INVESTMENT HIGHLIGHTS

• Higher finance cost and higher effective tax rate pulled down 4QFY18 normalised earnings to RM104.9m

• Full year FY18 normalised earnings contracted by -26.7%yoy, which is worst than our expectation

• Lower FY18 capital spending of RM2,316m (-22.5%yoy) in order to maintain a healthy cash level

• FY18 dividend drastically reduced to 2sen as compared to 21.1sen in FY17

• Maintain SELL with a revised target price of RM2.33

Weaker 4QFY18 normalised earnings. Telekom Malaysia Bhd’s (TM) 4QFY18 normalised earnings came in at RM104.9m, which translates into a decline of -53.8%yoy. This was mainly impacted by higher finance cost and higher effective tax rate.

FY18 financial performance missed expectation. The weaker 4QFY18 normalised earnings led to lower full year FY18 normalised earnings of RM632.4m (-26.7%yoy). Note that the profit margin reduced to 5.4% from 7.1% in FY17. All in, TM’s financial performance failed to kept pace with our expectation, accounting for 87.7% of full year FY18 earnings estimates.

Weaker Broadband customer base. As at 4QFY18, the total broadband customer base dwindled by -4.2%yoy and -2.3%qoq to 2,234k customers. This was mainly caused by the reductions in Streamyx customer base to below one million customers. Fortunately, unifi customer base expanded to 1,261k customers as more customers are moving up the value chain with convergence. At present, the convergence/TM households are at 53%. Meanwhile, unifi ARPU is trended lower to RM84/mth from RM197/mth as at 4QFY17.

Capital expenditure (capex). TM eased its FY18 capex to RM2,136m (-22.5%yoy), which is lower than what the management has previously guided. This led to lower capex-to-revenue ratio of 18.1% as compared to 22.8% recorded for FY17. We view that the lower capital spending helps the group to maintain a healthy level of cash and bank balance. As at 4QFY18, the cash and bank balances stands at RM2,826.3m, an increase of +64.3%yoy.

Source: MIDF Research - 27 Feb 2019