INVESTMENT HIGHLIGHTS

• 3QFY17 normalised earnings remain resilient, supported by higher revenue from internet and multimedia services

• In-line with our expectation, 9M17 normalised earnings grew by more than 10%

• Capital spending expected to accelerate further in 4QFY17

• Maintain BUY on TM with a revise target price of RM7.72

Resilient 3QFY17 normalised earnings performance. Telekom Malaysia Bhd’s (TM) 3QFY17 normalised earnings remain resilient at RM203.5m while revenue increased marginally by +0.6%yoy to RM2,940.4m. Higher revenue was recorded from internet and multimedia services. Nonetheless, the increase in revenue was partially offset by higher operating costs.

9MFY17 normalised earnings came in within expectation. On a year-to-date basis, TM’s 9MFY17 normalised earnings improved by +11.0% yoy to RM641.3m from RM578.0m as compared to the previous corresponding period. This was premised on better revenue performance and expansion in profit margin. All in, the results came in within our and consensus expectations, accounting for 71.3% and 75.4% of full year FY17 earnings estimates respectively.

Broadband. As at 3QFY17, the broadband customer base remained resilient at 2,350k customers (-0.8%yoy). Nonetheless, TM managed to grow its Unifi customer base to 1,062k (+15.3% yoy). The Unifi customer base constitutes 45.2% (3Q17: 38.9%) of total broadband customer base. In addition, approximately 94% of the Unifi customers are on broadband packages of at least 10mbps. The higher proportion of Unifi customers has led to higher 3QFY17 ARPU of RM199/mth from RM197/mth as at 3QFY16.

Capital expenditure (capex). TM’s capex accelerated by +2.6% yoy to RM734m as at 3Q17. This translates into capex-to-revenue ratio of 25.0%. Cumulatively, the group’s 9MFY17 capex amounted to RM1,633m or capex-to-revenue ratio of 18.4%. Breakdown on 9MFY17 capital spending includes core network (36%), access (43%) and support systems (21%). For 4QFY17, management guided that capexto-revenue ratio is expected to accelerate between 25-30%.

Impact. We are fine-tuning the data and voice revenue lower to better reflect the results thus far. Consequently, FY17 and FY18 earnings estimates are adjusted slightly downwards by -1.6% and -0.5% respectively.

Target price. Following our earnings adjustment, we are revising our target price to RM7.72 (previously RM7.77). This 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 management is planning to launch more “unifi mobile” (previously called webe) services in 1QFY18. 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 Nov 2017