Review

• TM reported 9MFY19 net profit of RM684mn (+718.9%). However, stripping off exceptional items amounting to RM134mn mainly relating to the impairment of fixed network assets corresponding to the reduction in Streamyx’s pricing (RM125mn), core net profit of RM811mn (+53.7%) came above ours and consensus full-year estimates at 91.4% and 88.5% respectively. The surprise on the upside was due to lower-than-expected opex, though opex in 3QFY19 did pick up QoQ which is typical of the higher number of customer projects undertaken in 2H.

• YoY. 9MFY19’s core net profit jumped 53.7% to RM811mn mainly due to cost optimisation initiatives with savings realised across the board except for manpower which increased on higher staff benefits. Revenue however fell 3.8% to RM8.4bn mainly due to lower contributions from voice (- 10.0%) and internet (-6.7%) which outweighed higher contributions from data (+12.9%). Voice suffered from reduced traffic minutes and customers while internet was affected by lower fixed broadband ARPU and subscribers.

• QoQ. 3QFY19’s revenue and core net profit grew 3.0% and 26.9% to RM2.9bn and RM288mn, driven by other and non-telecommunication services (+22.2%) which includes one-off from a joint land development via TM Facilities, the group’s subsidiary involved in the provision of property development activities, which flowed directly to the bottom-line. Meanwhile, revenue from voice (-0.5%), internet (-0.4%), and data (-1.8%) declined. Of note, the downtrend in internet revenue stabilised further with Streamyx net churns of 37k largely offset by unifi net adds of 34k. That said, we continue to view downside to it in the quarters ahead due to the reduction in Streamyx’s pricing effective September 2019 (end- 3QFY19) and tight competition from peers. For reference, during the quarter, Maxis recorded 34k net adds to its fixed broadband business, similar to unifi.

• 9MFY19’s CAPEX as a % of revenue was at 8.8%. While this is far behind the 18% that was earlier guided for FY19, management said that it is largely on track albeit it is now expected to be slightly lower than 18%. Hence, this suggests a ramp up of CAPEX in 4QFY19 which includes plans to upgrade the group’s copper network and expand its mobile business.

• Separately, no dividend was declared (YTD: nil) but as per the previous corresponding period, we only expect one in the later part of the year. At current levels, our latest FY19 dividend forecast of 13.9sen/share which is based on an assumed payout ratio of 50% (within the group’s dividend policy of 40-60% of PATAMI), implies a yield of 3.7%.

Impact

• Upon revising our cost assumptions lower, our earnings estimates for FY19/FY20/FY21 are raised by 17.8%/5.2%/4.8%.

Outlook

• For FY19, management maintained its guidance with revenue to decline by low-to-mid single digit and EBIT to be higher than FY18 (FY18 normalised EBIT: RM1.1bn) but CAPEX as a percentage of revenue to be slightly below 18%. Management also reiterated its plan to beef up its mobile network and highlighted the importance of having access to the right spectrum with the 700MHz being of interest to the group.

Valuation

• Following our earnings upgrade, we arrive at a higher TP of RM3.62/share (previously RM3.49/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 - 27 Nov 2019