Review

• TM reported 1HFY19 net profit of RM423mn (+63.1%). However, excluding exceptional items amounting to RM129mn mainly relating to the impairment of fixed network assets corresponding to the imminent reduction in the price of Streamyx (RM125mn), core net profit of RM523mn (+100.4%) accounted for 56.1% and 59.5% of ours and consensus estimates. We deem the results to be in line as we expect 2HFY19’s earnings to moderate alongside the reduction in Streamyx’s price.

• As per the previous corresponding period, no dividend was declared which we only expect in the later part of the year. At current levels, our latest FY19 dividend forecast of 11.8sen/share based on an assumed payout ratio of 50% (within the group’s dividend policy of 40-60% of PATAMI), implies a yield of 2.9%.

• YoY. 1HFY19’s core net profit surged 100.4% to RM523mn mainly due to cost optimisation initiatives whereby savings were realised across most areas including direct costs (e.g., lower content cost and domestic roaming rate), materials, and marketing. Revenue however declined 4.1% to RM5.5bn mainly due to declining contributions from voice (-8.5%) and internet (-7.0%), albeit partially offset by recovering contributions from data (+14.0%) which was driven by domestic wholesale at TM GLOBAL and private domestic network at TM ONE. Voice was affected by lower customers and traffic minutes while internet by fixed broadband subscriber net churns and lower ARPU.

• QoQ. Revenue declined marginally 0.4% QoQ to RM2,769mn on lower contributions from voice (-2.7% QoQ) and internet (-1.0% QoQ), albeit partially offset by growing contributions from data (+2.0% QoQ). While the decline in internet revenue appears to have stabilised, we expect further downside in the quarters ahead with existing Streamyx subscribers set to enjoy a lower price of RM69/month effective September 2019. Also a cause for concern, note that unifi’s net add momentum has been moderating with 2QFY19’s of 16k QoQ marking the 3rd consecutive quarter in which net add moderated.

• In terms of profitability, core net profit margins while higher 2.9pp YoY, eased 2.5pp QoQ to 8.2% as cost increased due to a higher number of customer projects and provision for staff benefits. The latter followed the recent conclusion of collective agreement with unions for non-executives which management expects to persist in the quarters ahead.

• Meanwhile, CAPEX as a percentage of revenue was at 8.1% but remained guided by management at ~18% as it is expected to accelerate in 2HFY19 and this includes plans to upgrade the group’s copper network. As for gearing, the group’s gross debt to EBITDA inched up from 2.24x as at 1QFY19 to 2.46x as at 2QFY19.

Impact

• Due to unifi’s moderating net add momentum, we have lowered our net add assumptions and correspondingly cut our FY19/FY20/FY21 earnings estimates by 4.8%/4.9%/4.2% to RM888mn/RM901mn/RM1,039mn.

Outlook

• For FY19, management maintained its guidance with revenue to decline by low-to-mid single digit, EBIT to be higher than FY18 (FY18 normalised EBIT: RM1.1bn) and CAPEX as a percentage of revenue at ~18% (similar to FY18). Meanwhile, management also alluded that the group is planning to beef up its mobile network to supplement its fixed network but also highlighted that this necessitates access to the right spectrum.

Valuation

• Following our earnings cut, we arrive at a slightly lower TP of RM3.49/share (previously RM3.51/share) based on DCF valuation with a WACC of 12.5% and long-term growth rate of 1.0%. Reiterate Sell. Key risks include heightening competition within the broadband segment.

Source: TA Research - 29 Aug 2019