INVESTMENT HIGHLIGHTS

• 2QFY19 normalised earnings of RM226.8m (+45.6%yoy) surpassed ours and consensus expectation

• Effective cost rationalisation programme led to -11.0%yoy reduction in total cost for 1HFY19

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

• Maintain NEUTRAL with an unchanged target price of RM3.54

Stellar 2QFY19 normalised earnings. Telekom Malaysia Bhd’s (TM) 2QFY19 normalised earnings increased significantly by +45.6%yoy to RM226.8m. The surge in earnings was mainly attributable to impressive reduction in cost in conjunction with cost rationalisation exercise under the Performance Improvement Programme (PIP) 2019. This is despite a -5.7%yoy reduction in revenue to RM2,768.6m.

Within expectation. The improvement in 2QFY19 normalised earnings led to 1HFY10 normalised earnings of RM523.2m. This represents an increase of +100.4%yoy. We understand that the bulk of the exceptional items pertained to impairment of network assets. All in, the TM’s 1HFY19 financial performance came in within ours but above consensus expectations, accounting for 50.7% and 59.5% of full year FY19 earnings estimates respectively.

Improvement in opex/revenue ratio. 1HFY19 total cost came in at RM4,814m, a reduction of -11.0%yoy. This led to lower opex/revenue ratio of 86.8% from 93.5% as at 1HFY18. 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, advertising and promotion costs, staff benefit.

Broadband. As at 2QFY19, the total broadband customer base dwindled further by -5.2%yoy to 2,162k customers. This was mainly caused by the reductions in Streamyx customer base to 823k customers (-24.1%yoy). Fortunately, unifi customer base expanded to 1,339k customers (+10.0%yoy) as more customers are moving up the value chain with the convergence offerings. At present, the convergence/TM households remain at 56%. Meanwhile, unifi ARPU is trended lower to RM177/mth from RM190/mth as at 2QFY18.

Capital expenditure (capex). TM’s 2QFY19 capex came in at RM299m. This led to 1HFY19 capex of RM450m, a decline of -36.6%yoy. The lower capital spending translates into to lower capex-to-revenue ratio of 8.1% as compared to 12.3% recorded for 1HFY18. Despite this, management maintains its capex guidance of 18% for full year FY19. This indicates that 2H1FY19 capital spending is likely to increase significantly. Breakdown of 1HFY19 capex includes core network (19%), access (54%) and support systems (27%).

Impact. No change to our earnings estimates at this juncture.

Target price. We are maintaining our target price of RM3.54. This is premised on Dividend Discount Model valuation methodology with WACC of 7.5%.

Maintain NEUTRAL. We commend the group’s cost rationalisation programme which has significantly improves the group’s profit margin and thus, profitability. However, we remain concern on the group’s ability to grow its revenue, especially its unifi business which is the group’s main revenue contributor. Note that the broadband ARPU and the customer base continue to dwindle in view of the competitive market landscape. Despite the expectancy of higher earnings growth, shareholder is limited to receive up to 60% of the group’s PATAMI based on the revised dividend policy. Coupled with the commitment to its capex requirement, we view that dividend yield to be less than four percent. All factors considered, we are maintaining our NEUTRAL recommendation on TM.

Source: MIDF Research - 29 Aug 2019