INVESTMENT HIGHLIGHTS

• 1QFY19 normalised earnings of RM296.4m (+181.5%yoy) surpassed ours and consensus expectation

• Effective cost rationalisation programme led to -14.3%yoy reduction in total cost

• However, revenue remain subdued as Unifi and TM One continue to face intense competition and price erosion

• Upgrade to NEUTRAL with a revised target price of RM3.54

Stellar 1QFY19 normalised earnings. Telekom Malaysia Bhd’s (TM) 1QFY19 normalised earnings increased significantly by +181.5%yoy to RM296.4m. The surge in earnings was mainly attributable to impressive reduction in cost in conjunction with the cost rationalisation exercise under the Performance Improvement Programme (PIP) 2019. This is despite a -2.4%yoy reduction in revenue to RM2,778.9m.

Improvement in opex/revenue ratio. 1QFY19 total cost came in at RM2,297m, a reduction of -14.3%yoy. This led to lower opex/revenue ratio of 82.7% from 91.4% as at 1QFY18. The reduction in total cost mainly stem from lower direct costs and other operating costs. Note that some of the component of direct costs includes domestic roaming charges, content cost, and advertising and promotion costs.

Broadband. As at 1QFY19, the total broadband customer base dwindled by -5.2%yoy to 2,195k customers. This was mainly caused by the reductions in Streamyx customer base to 872k customers (- 22.8%yoy). Fortunately, unifi customer base expanded to 1,323k customers (+12.4%yoy) as more customers are moving up the value chain with convergence. At present, the convergence/TM households are at 56%. Meanwhile, unifi ARPU is trended lower to RM179/mth from RM193/mth as at 1QFY18.

Capital expenditure (capex). TM eased its 1QFY19 capex to RM151m (-53.4%yoy). This led to lower capex-to-revenue ratio of 5.4% as compared to 11.5% recorded for 1QFY18. Despite this, management maintain its capex guidance of 18% for full year FY19. This indicates that 2H1FY19 capital spending is likely to increase significantly. In addition, we also view that the group is trying to conserve cash. Note that in spite of lower opex and capex, 1QFY19 cash balance remain relatively stable at RM2.9b (+1.3%yoy).

Source: MIDF Research - 31 May 2019