INVESTMENT HIGHLIGHTS

• 2Q17 normalised earnings grew by +24.2%yoy due to healthier normalised PATAMI margin

• 1H17 financial results came in as expected

• Higher proportion of Unifi customer (42.7% of total broadband customer base) lifted ARPU to RM200/mth

• Maintain BUY on TM with an unchanged higher target price of RM7.77 per share

Healthier profit margin. Telekom Malaysia Bhd’s (TM) 2Q17 normalised earnings amounted to RM208.0m (+24.2%yoy). Despite a marginal contraction in revenue of -2.1%yoy due to lower topline contribution from managed accounts, the normalised PATAMI margin expanded to 7.0% from 5.5% as at 2Q16. This was mainly driven by lower effective tax rate of 35.1% as compared to 49.6% as at 2Q16 as well as lower depreciation and amortisation charges (-11.2%yoy).

1H17 earnings came in as expected. The strong 2Q17 financial results led to higher 1H17 normalised earnings of RM437.8m (+18.2%yoy). This came in within ours and consensus expectations, accounting for 48.7% and 51.5% respectively of full year FY17 earnings estimates.

Broadband. As at 2Q17, the customer base remained resilient at 2,326k customers (-0.3%yoy). Nonetheless, TM managed to grow its Unifi customer base to more than one million (+11.9%yoy) which constitutes 42.7% (2Q16: 38.1%) of total broadband customer base. In addition, approximately 90% of the Unifi customers are on broadband packages of at least 10mbps. These factors has led to higher 2Q17 ARPU of RM200/mth from RM194/mth as at 2Q16.

Capital expenditure (capex). TM eased its capex spending in 2Q17 to RM547m, a decline of -11.8%yoy. This was mainly due to lower capital spending on network access (-31.7%yoy). Cumulatively, the group’s 1H17 capex dropped by -4.2%yoy to RM899m which translates into to lower capex-to-revenue ratio of 15.1% (1H16: 15.9%).

Dividend. The group declared a first interim dividend of 9.4sen or RM353.2m in 2Q17. This is slightly higher as compared to 9.3sen declared in 2Q16.

Impact. We are keeping our earnings estimates unchanged at this juncture.

Target price. We are maintaining our target price of RM7.77 per share based on 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 - 30 Aug 2017