TM’s reported 1QFY18 core net profit of RM115.3mn (-48.1% QoQ, 49.8% YoY) came below ours and consensus estimates both at 13.4%. Similar to previous corresponding quarters, no dividend was declared.
YoY, revenue declined by 4.0% mainly on lower contributions from TM ONE (-9.7% YoY) and TM GLOBAL (-6.8% YoY). TM ONE was affected by lower recognition of USP revenue as well as lower contracts from both public and enterprise customers leading to lower voice and data revenue. Whereas TM GLOBAL experienced lower STD/IDD traffic minutes and contribution from domestic leased revenue. Management, however, maintained its headline KPIs for FY18 revenue growth at 3.54.0%. While it is still early to guide on the trajectory of TM ONE, efforts have been made to drive the segment via the offering of customised solutions to respective industries (i.e. education, finance, oil & gas).
QoQ, revenue declined by 11.1% mainly on lower contributions from TM ONE (-16.6% QoQ) and TM GLOBAL (-22.8% QoQ). By product, internet was the only product that registered growth, albeit marginally by 0.1% QoQ on the back of higher contributions from subscriber growth on unifi mobile and content uptake on unifi TV. Within the broadband space, subscriber trends and run rates sustained with net adds for unifi (51k QoQ) and net churns for Streamyx (78k QoQ). While Streamyx ARPU held steady at RM90, unifi ARPU declined marginally by 1.5% QoQ to RM194 due to higher uptake of lower entry packages like the unifi lite 10Mbps plan. Meanwhile, driven by positive uptake of unifi mobile on the back of the launch of its #BEBAS plan, the number of TM households on 3 or more of the group’s services increased by 3pp QoQ to 45%.
Normalised EBIT is lower by 26.5% QoQ and 29.6% YoY in tandem with the lower revenue. Overall costs as a percentage of revenue increased by 2.8pp YoY to 92.7% mainly due to higher network cost for mobile and higher rental for LTE sites.
Taking a conservative stance, we have reduced our contributions from TM ONE and TM Global and now project revenue decline of 2.6% YoY in FY18 versus growth of 3.8% previously. Correspondingly, our FY18/FY19/FY20 earnings estimates are reduced by 23.3%/21.3%/20.3% to RM657.9mn/RM734.8mn/RM780.6mn.
Despite the challenging environment, 2018’s headline KPIs were maintained with revenue growth at 3.5% to 4.0% (unchanged from FY17) and EBIT to sustain at FY17’s level (RM1,187.4mn). CAPEX as a percentage of revenue is expected to be in the range of 25-30%. Meanwhile, management reiterated its dividend policy of RM700mn or up to 90% of normalised PATAMI.
Focus will be placed on gaining a larger share of household wallet via its convergence strategy whereby efforts (i.e. sweating ports) are being made to increase the number of TM households on 3 or more of the group’s services.
Our concerns for the group surround the new government’s approach towards halving the subscription costs and doubling the speeds of broadband. This will be a prelude to declining ARPU and incremental capex to support any unprecedented spur in data usage triggered by higher broadband speed. Management alluded that it is engaging with the government in hopes to work out a feasible solution.
Rolling forward our base year valuation to CY19, we raise our TP for TM to RM4.05/share – based on DCF valuation with a WACC at 9.9% and a longterm growth rate of 1.0%. Despite the group’s dominant fixed broadband position and convergence aspirations, we reiterate our SELL recommendation in view of the challenging environment and downside risk to broadband ARPU.