TM’s 1Q results would have been in line with expectations if not for tax incentives. 1Q EBIT growth appears to be trending higher than management’s KPIs, but management expects upward pressure on costs going forward. With capex expected to remain elevated in FY13, we believe management will likely keep a tight lid on cash and dampen expectations of special dividends. Maintain NEUTRAL.    
 
-  Above expectations. TM’s 1Q core net profit of MYR234m (+27.6% y-o-y; -18.9% q-o-q) was above both our and consensus expectations, accounting for 33% and 30% of both our and consensus full-year estimates respectively. The key variance was lower-than-expected effective tax rate due to HSBB-related tax incentives. Otherwise, 1Q PBT was within expectations.   

- Internet drives q-o-q revenue growth.  Q-o-Q, revenue growth was seasonally weaker (-13.7%) mainly due to the absence of lumpy contributions from other businesses. Only revenue from Internet grew (+2.9%) while voice (-3.2%), data (-9.4%) and others (-49.5%) saw declines. This resulted in EBIT margin declining 1.7%-pts q-o-q to 12.3%. Coupled with a higher effective tax rate of 3.1% (4Q12 benefitted from a negative tax charge of MYR31m), core PAT declined 18.9%.

-  Briefing highlights. As anticipated, TM’s FY13 EBIT growth KPI target of 3% appears conservative, in our view (1Q: +9.6% y-o-y). But 
management foresees pressure on costs as spending on marketing could increase to stimulate revenue growth, while maintenance costs could rise if TM receives more customer projects.  Management has guided for FY13 effective tax rate of 10%, mainly due to HSBB-related tax incentives. The effective tax should normalise towards the statutory tax rate in 2014 once these tax incentives expire in Sep 2013.

- Forecasts. We raise our FY13 earnings by 22.6% after revising FY13 tax rate assumption lower to 10% (previously 25%).  

- Maintain NEUTRAL. Following our upgrade in FY13 earnings and roll over of valuations to FY14, we raise our fair value to MYR6.00.

Source: RHB