TM’s 9M13 results were a positive surprise due to better-than-expected EBIT margins.  Management was tight-lipped on plans for HSBB Phase 2, but indicated that it was a continuation of the current partnership with the Government - which suggests possible further Government co-investment. We see this as a longer term catalyst. TM, however, lacks earnings growth in the short term due to the expiry of tax incentives.

- Above expectations. Telekom Malaysia (TM)’s 9M13 core net profit of MYR749m (+22.7% y-o-y) accounted for 84% and 87% of our and consensus estimates respectively. The key variances were: lower-than-expected cost pressures and higher-than-expected high-speed broadband (HSBB)-related tax incentives.  

- Stable quarterly revenue. Q-o-q, it was a seasonally softer quarter (due to festivities), which resulted in weak voice (-4.7%), but this was sufficiently mitigated by strong Internet (+7.5%) and data (-4.8%) despite lower lumpy contributions from other businesses (-8.1%). Its EBIT margin improved 1.4% ppt q-o-q to 14.0% due to lower subscriber acquisition activities and other operating costs. Coupled with a lower effective tax rate of 6.2% (2Q13: 8.2%), core PAT jumped 10.6%.

- Briefing highlights. The continued strength of TM’s EBIT margin is still a positive surprise but runs contrary to management’s initial expectation that margins will be squeezed in 2H from higher labour, content and HSBB maintenance costs. Nonetheless, we agree with management that margins will likely trend lower in 4Q, as TM ramps up marketing activities, the full-quarter impact of Astro SuperSport channels is felt, and while new customer projects may increase maintenance costs.    

- Dividends. As expected, no dividends were declared. We expect TM to declare a final DPS of 12.7 sen (based on a 90% payout policy).

- Forecasts. We raise our FY13F-14F earnings by 10-11% after factoring in the better-than-expected EBIT margins and low taxation.

- Maintain NEUTRAL. We remain NEUTRAL on TM, with our revised DCF-based FV at (WACC: 8.1%, TG: 1.5%) MYR5.50 (previously MYR5.30). As FY14 earnings growth is lacking due to the expiry of tax incentives, on top of the minimal room to gear up further for capital management initiatives, we think the stock lacks immediate catalysts.

Source: RHB