INVESTMENT HIGHLIGHTS

• 1QFY18 normalised earnings came in below expectation in view of lower revenue from voice, data and other segments, while operating expenses remain elevated
• Slight contraction (-2.7%yoy) in 1QFY18 total broadband customer base due to the decline in Streamyx users
• 1QFY18 capital spending focuses on expansion of network development for convergence
• Downgrade to NEUTRAL with a revised target price of RM4.09 base on DDM valuation methodology

Weaker profit margin. Telekom Malaysia Bhd’s (TM) 1QFY18 normalised earnings came in at RM105.3m. This translates into a decrease of -54.2%yoy as compared to 1QFY17. The reduction in normalised earnings was mainly led by the decline in voice, data and other telecommunication-related services revenues (Refer to Appendix). On the contrary, the group’s operating expenses remain elevated. As a result, the group’s 1QFY18 profit margin contracted to 3.7% as opposed to 7.8% achieved in 1QFY17. All in, TM’s 1QFY18 financial performance came in below ours and consensus expectations, accounting for 11.2% and 12.2% of full year FY18 earnings estimates respectively.

Broadband. As at 1QFY18, the total broadband customer base dwindled by -2.7%yoy to 2,306k customers (1QFY17: 2,370k customers). This was mainly caused by -18.8%yoy reductions in Streamyx customer base to 1,129k customers. Fortunately, unifi customer base expanded to 1,177k customers (+20.2%yoy) as more customers are moving up the value chain with convergence. At present, the convergence/TM households are at 45%. Meanwhile, unifi ARPU remained resilient above RM190/mth.

Capital expenditure (capex). TM eased its 1QFY18 capex to RM327m (-7.1%yoy). This led to lower capex-to-revenue ratio of 11.5% as compared to 11.9% recorded in 1QFY17. Bulk of the capex was utilised for expansion of network development for convergence. Currently, more than three million highspeed ports have been delivered. Breakdown on 1QFY18 capex includes core network (17%), access (65%) and support systems (18%).

Source: MIDF Research - 23 May 2018