KEY INVESTMENT HIGHLIGHTS

• Significant improvement on FY19 financial performance was mainly due to the cost rationalisation programme

• Nonetheless, main concern lies on the group’s ability to generate revenue, especially for the Unifi segment

• FY19 dividend amounted to 10sen, in-line with its dividend policy

• Anticipating future capital spending to be elevated in the foreseeable years

• Downgrade to SELL with a revised TP of RM3.15

Expansion in profit margin. Telekom Malaysia Bhd’s (TM) 4QFY19 normalised earnings increased by +189.9%yoy to RM189.9m. This was mainly attributable to significant cost reduction. Note that the profit margin improved to 6.3% from 3.4% as at 4QFY18.

In-line with expectations. Cumulatively, full year FY19 normalised earnings surged by +58.3%yoy to RM1,000.8m, premised on drastic cost reduction across all cost elements with the exception of manpower. This came in within ours and consensus expectations, accounting for 97.1% and 102.1% of full year FY19 earnings estimates.

Opex/revenue ratio improves further. TM’s FY19 total cost came in at RM10,001m, a decline of -15.9%yoy. This led to healthier opex/revenue ratio of 87.5% (vs FY18: 100.6%). The reduction in costs mainly stem from lower direct cost (-14.3%yoy) and other opex (- 28.1%yoy)

Broadband. The total broadband customer contracted by -2.2%yoy to 2,184k customers as at 4QFY19. This was mainly caused by the reduction in Streamyx customers base to 741k customers (-20.8%yoy). On the contrary, unifi customer based expanded to 1,444k customers (+11.2%yoy). Meanwhile, Streamyx and Unifi ARPU dropped to RM93/mth (4QFY18: RM113/mth) and RM153/mth (4QFY18: RM177/mth) respectively due to Streamyx price and adjustment and year-end promotion.

Capital expenditure (Capex). TM’s 4QFY19 capex decreased by - 23.6%yoy to RM621m. This led to full year FY19 capex of RM1,363m, a decline of -36.1%yoy. There was lower spending across segment which encompasses core network (-35.7%yoy), access (-40.9%yoy) and support system (-21.6%yoy).

Impact to earnings. Premised on the group’s guidance on future financial performance, we are revising downward FY20 and FY21 earnings by -13.2% and -15.7%yoy to RM935.7m and RM948.3m respectively. Note that we are revising downward the contribution from Unifi and TM ONE.

Source: MIDF Research - 24 Feb 2020