INVESTMENT HIGHLIGHTS

• 2QFY18 normalised earnings down by -25.1%yoy mainly due to lower contribution from voice and data services

• Consequently, 1HFY18 normalised earnings reduced to RM261.1m, in-line with our expectation

• Availability of unifi 30Mbps basic plan to all segments of the market exerts downward pressure on unifi ARPU

• Downgrade to SELL with an unchanged target price of RM3.02 base on DDM valuation methodology .

Subdued 2QFY18 normalised earnings. Telekom Malaysia Bhd’s (TM) 2QFY18 normalised earnings came in at RM155.8m. This translates into a decrease of -25.1%yoy as compared to 2QFY17. The reduction in normalised earnings was mainly led by decline in voice and data services (Refer to Appendix). In addition, higher provision for bad debt and higher directs costs also led to lower profit margin of 5.3% from 7.0% achieved in 2QFY17.

1HFY18 normalised earnings came in expected. The weaker 2QFY18 financial performance led to lower 1HFY18 normalised earnings of RM261.1m (-40.4%yoy). All in, TM’s 1HFY18 financial performance came in within ours but fell below consensus’ expectations, accounting for 52.1% and 40.2% of full year FY18 earnings estimates respectively.

Broadband. As at 2QFY18, the total broadband customer base dwindled by -2.4%yoy and -0.2%qoq to 2,302k customers. This was mainly caused by -19.7%yoy reductions in broadband (Streamyx) customer base to 1,085k customers. Fortunately, unifi customer base expanded to 1,217k customers (+20.9%yoy) as more customers are moving up the value chain with convergence. At present, the convergence/TM households are at 47%. Meanwhile, unifi ARPU trended lower to RM191/mth from RM200/mth as at 2QFY17.

Capital expenditure (capex). TM eased its 1HFY18 capex to RM710m (-7.1%yoy) as the group is more selective on critical projects. This led to lower capex-to-revenue ratio of 12.3% as compared to 15.1% recorded in 1HFY17. Breakdown on 1HFY18 capex includes core network (18%), access (59%) and support systems (23%). We view that the lower capital spending helps to maintain the group’s cash balance. Note that 2QFY18 cash and bank balances stands at RM1,605.7m, a slight increase of +3.3%yoy (vs 2QFY17: RM1,554.5m).

Target price. We are maintaining our target price of RM3.02. This based on Dividend Discount Model valuation methodology.

Downgrade to SELL. The increasing regulatory and competitive pressures have negatively impacted all the group’s business segments. We foresee these pressures to persist in the immediate term. Our main concern lies with unifi, the group’s largest revenue contributor. We view that the availability of unifi 30Mbps basic plan to all segments of the market could lead to TM’s unifi customers downgrading their respective broadband packages should the monthly usage does not exceed 60GB. This would put downward pressure on unifi ARPU. Note that the unifi 30MBps basic plan is available at RM79/mth while unifi lite plan 10Mbps starts from RM129/mth. Meanwhile, we are concerned on the group’s ability to manage its operating expenses efficiently. Its total cost as a percentage of revenue has increase steadily beyond 90%. Due to the earnings pressure and the group’s capex commitment for long-term growth, we expect its dividend payment to decline as well. At this juncture, we view that dividend yield to hover around three percent only. All factors considered, we are downgrading our call recommendation to SELL from NEUTRAL previously.

Source: MIDF Research - 30 Aug 2018