Review

• Telekom Malaysia Berhad reported a FY16 core net profit of RM848mn (+30.1% QoQ, -6.3% YoY). Numbers exceeded ours and consensus expectations at 110.5% and 105.5% respectively. A second interim dividend of 12.2sen was declared, bringing the YTD total to 21.5sen or a payout ratio of 104.1%.

• QoQ. A jump in QoQ profits were due to a combination of lower taxes (- 94.4% QoQ) and revenue growth within data (+10.6% QoQ) and others (+28.8% QoQ). Unifi trends remained strong, as it sustained its net adds momentum, with ARPU breaching the RM200 mark. Unifi has been running a promotional campaign, with prices starting from RM179/month (RM20 discount). Financial details on webe remains scarce, but we understand its performance is in line with internal targets.

• YoY. Revenue and EBITDA increased 2.9% YoY and 3.9% YoY. Offsetting a decline in voice (-5.0% YoY), growth was driven by internet (+8.9% YoY) and others (+6.4% YoY). Others were driven by higher USP amortisation and customer projects at managed accounts. Data revenues increased 2.8% YoY, due to wholesale Ethernet, IRU and international leased revenue.

• Internet is the largest contributor to revenue at 30.4%. Unifi growth remains strong, with YoY net adds of 110k subscribers. Upselling activities are proving fruitful, with more customers on higher speed packages and increased buys of Premium channels. YoY, ARPU increased 5.8% to RM201. That said, we do expect some moderation in Unifi ARPU due to potential down trading from an expected upgrade in packages. Meanwhile, Streamyx continued to record net subscriber churns (-80k). This, however, was partly offset by higher Streamyx ARPU of RM92 (+3.4% YoY).

• Costs increased 4.2% YoY. This was driven by other operating costs (+16.4% YoY), marketing expenses (+12.7% YoY), depreciation & amortisation (+8.1% YoY) and direct costs (+5.6% YoY). Other operating costs were impacted by a higher forex impact on international trade settlement and increased license fees. There were also an accelerated depreciation and write off of WiMAX assets totalling RM195.2mn.

Impact

• Tweaking our numbers to be in line with guidance, we impute higher losses at webe and increase our capex assumption to 30% of revenue. We adjust our earnings for FY17/FY18 by -14.8%/-19.1% to RM806mn/ RM838mn. We are now forecasting a 2017 revenue and EBIT growth of 4.7% YoY and 1.7% YoY. However, we expect a 5.0% YoY decline in net profit, premised on higher net finance costs.

Outlook

• Revealing its KPIs, management is expecting a revenue growth of 3.5-4.0% in 2017. Implying lower margins, however, EBIT is expected to maintain at 2016 levels. This will be partly contributed by higher depreciation expenses, with capex expected to remain elevated at 30%. Spending will be incurred on the rollout of HSBB2, SUBB, undersea cables and webe.
• Capitalising on latent demand, we expect medium term subscriber growth to be driven by the HSBB2 and SUBB projects. However, we do envisage ARPU challenges from directives to: 1) Offer higher broadband speeds at same price effective January 2017, and 2) A further doubling of speeds along with a 50% reduction in prices within two years. With regards to a potential reduction in prices, the group continues to engage with regulators on ways to achieve this.
• Making progress, webe has been made nationwide available on 30th September 2016. Aiming for simplicity, its postpaid plan is priced at RM79/month with unlimited data, voice and SMS. There are now more than 2,000 operational sites rolled out, with a population coverage of 61%. The introduction of webe completes its quad play aspirations, which include fixed broadband, IPTV, mobile data and fixed line services. Launch of its prepaid products are targeted for the 2H2017. We forecast narrowing losses from webe, with a breakeven timeline of five years.

Valuation

• We lower our TP for TM to RM6.95/share (from RM7.95/share) – based on a DCF valuation with WACC at 6.9% and long term growth rate of 1.0%. The decrease in our TP is due to increased initial loss assumptions at webe and higher capex estimates. Nevertheless, we maintain our BUY call on the group. This is premised on its dominant position in fixed broadband, completion of its quad play aspirations and relatively undemanding valuation at an EV/EBITDA of 7.1x.

Source: TA Research - 23 Feb 2017