INVESTMENT HIGHLIGHTS

• 3Q16 financial performance lifted by lower net finance cost

• However, 9M16 normalised earnings still down by - 10.0%yoy in view of higher depreciation and amortisation charges

• Capex continues to intensify in-line with the expansion of major projects

• Maintain BUY with a revised target price of RM7.42 per share

Lower net finance cost. Telekom Malaysia Berhad (TM) recorded 3Q16 normalised earnings of RM207.5m, an increase of +24.4%yoy. Bulk of the exceptional items pertained to unrealised forex loss on long term loans (RM36.0m). The increase in the normalised earnings was mainly attributable to lower net finance cost of RM93.3m (-52.4%yoy).

Slight margin erosion. Cumulatively, 9M16 normalised earnings came in at RM578.0m. This represents a decrease of -10.0%yoy. This was mainly attributable to higher depreciation charges and higher net finance cost. Meanwhile, 9M16 revenue increased slightly by +3.4%yoy to RM8,832.9m. All in, the group’s 9M16 normalised earnings came in below ours and consensus’ expectation, accounting for 64.0% and 68.1% of full year FY16 earnings estimates respectively.

Broadband. The broadband customer base expanded by +3.3%yoy in 3Q16 to 2,369k customers mainly driven by the higher UniFi take-up rate. UniFi subscribers grew by +16.1%yoy to 921k in 3Q16. Of this, 75% of the UniFi subscribers buy into packages of at least 10mpbs. Meanwhile, both Streamyx and UniFi ARPU trended higher at RM197 and RM90 respectively as at 3Q16.

Capex continues to increase. TM’s 3Q16 capex intensified to RM715m. This represents an increase of +53.1%yoy, which is in-line with the expansion of major projects. Cumulatively, 9M16 amounted to RM1,653m which translates into capex-to-revenue ratio of 18.7% from 13.5% in the previous corresponding period. The capex was allocated for core network (39%), access (40%) and support systems (21%). The management guided that capex will continue to accelerate in 4Q16.

Impact. We are revising FY16 and FY17 profit margin to better reflect the results thus far. As a result, FY16 and FY17 earnings are reduced by -6.2% and -6.4% respectively.

Source: MIDF Research - 28 Nov 2016