INVESTMENT HIGHLIGHTS

• Lower effective tax rate lifted 4Q16 normalised earnings by +2.9%yoy.

• Full year FY16 normalised earnings dragged by higher depreciation and amortisation costs

• UniFi’s customer base and ARPU continue to expand at a steady pace

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

• Maintain BUY on TM with an unchanged target price of RM7.42 per share

Lower effective tax achieved in 4Q16. Telekom Malaysia Bhd’s (TM) 4Q16 normalised earnings of RM269.9m, an increase of +2.9%yoy. Bulk of the exceptional items pertained to unrealised forex loss on long term loans amounting to -RM120.5m. The improvement in earnings was mainly attributable to lower effective tax rate of 5.1% (4Q15: 29.3%) after taking into account: i) losses before tax from Webe, and ii) recognition of investment tax allowances.

Meeting estimates. Cumulatively, full year FY16 normalised earnings came in at RM847.9m, a decrease of -6.3%yoy. Despite a +2.9%yoy increase in revenue was recorded, the drop in normalised earnings was mainly impacted by higher depreciation and amortisation costs (+8.1%yoy). Nonetheless, the results came in within ours but slightly exceeded consensus' expectations, accounting for 100.0% and 105.5% of full year FY16 earnings estimates respectively.

Broadband. The broadband customer base expanded by +1.3%yoy as at 4Q16 to 2,370k customers, mainly driven by higher UniFi take-up rate. UniFi subscribers grew by +13.1%yoy to 949k as at 4Q16. Meanwhile, UniFi’s average revenue per user (ARPU) trended higher at RM201/mth mainly attributable to upselling and higher buys of premium channels.

Capital expenditure (capex). In-line with management guidance, 4Q16 capex intensified by +22.8%yoy to RM1,662m. The elevated capex had led to full year FY16 capex of RM3,315m (+3.2%yoy). This also translates into higher capex/revenue ratio of 27.5% as compared to 21.4% achieved in FY15. The capex was allocated for core network (36%), access (40%) and support systems (21%). The increase in capital spending was in-line with the development of broadband and LTE network.

Dividend. In 4Q16, the group declared second interim single tier dividend of 12.2sen per share. On cumulative basis, a total dividend of 21.5sen per share has been declared for full year FY16, which translate into a payout ratio of approximately 95%. This came in slightly above full year FY15 dividend of 21.4sen per share.

Impact. We fine-tuned TM’s FY17 earnings estimates marginally lower by -0.8% as we trimmed our EBIT margin assumption to better reflect the results.

Target price. We maintain TM’s target price of RM7.42 per share based on Dividend Discount Model valuation methodology.

Maintain BUY. Despite the challenging market environment, we are comforted by the fact that UniFi’s customer base and ARPU continue to increase at a steady pace. Moving forward, we view that the progressive growth in TM’s broadband customer base would be further driven by the HSBB phase 2 and SUBB projects. Coupled with generous capex undertaking, TM would be able to remain committed to its pledge of providing higher speed broadband access more affordable to the masses. On the mobility segment, the group’s target to launch Webe’s new prepaid plan in 2H17 remains intact. We opine that the ‘quad-play’ offering would further strengthen TM’s position in the telecommunication industry. All factors considered, we reiterate our BUY recommendation on TM.

Source: MIDF Research - 23 Feb 2017