TA Securities comment on Telekom Malaysia 4Q18 Financial Performance

TA Securities comment on Telekom Malaysia 4Q18 Financial Performance:

TM reported FY18 net profit of RM153mn (-83.5% YoY). However, excluding exceptional items amounting to RM695mn mainly relating to the impairment of legacy network assets (RM983mn), core net profit of RM632mn (-26.7% YoY) came within ours but above consensus estimates at 99.2% and 107.3% respectively.

An interim dividend of 2.0sen/share (-90.7% YoY) was declared. This translates to a dividend payout of 49.5% over FY19’s reported EPS which is line with management’s revised dividend policy to 40-60% of PATAMI.

YoY. FY18’s core net profit declined 26.7% YoY mainly due to lower data (-8.7% YoY) and voice (-5.3% YoY) revenue. Data revenue was weighted by a provision of RM169.2mn to reflect the enforcement of the Mandatory Standard on Access Pricing while voice revenue was affected by lower traffic minutes on the back of a lower customer base. On the other hand, internet revenue grew (+3.6% YoY) on higher subscription to unifi tv content. Meanwhile, cost was well contained with cost as a percentage of revenue at 90.8% (-0.3pp YoY) with notable savings in the area of manpower (-5.3% YoY) and marketing (-17.7% YoY).

QoQ. Revenue climbed 4.9% QoQ, driven by voice (+7.9% QoQ) and data (+10.7% QoQ) while internet fell (-2.3% QoQ). Of note, despite heightened competition within the broadband segment during the quarter, subscriber trends continued with unifi net adds of 37k QoQ and Streamyx net churns of 89k QoQ, However, in our view, it is rather preliminary to ascertain if the trend will sustain into the coming quarters. This is in consideration that in FY18, while 239k Streamyx subscribers were upgraded to unifi, overall unifi net adds were lower at 172k, suggesting some migration of unifi subscribers to competitors.

As for the group’s financial position, gross debt to EBITDA improved further from 2.5x as at 3QFY18 to 2.4x as at 4QFY18.

Impact

Our FY19/FY20 earnings  are  adjusted by +4.5%/+1.1% to RM629mn/RM715mn after adjusting our cost assumptions to in tune with management’s guidance and imputing FY18 figures into our model. We also introduce our FY21 earnings estimates of RM803mn.

Outlook

Expecting FY19 to be another challenging year, management guided for revenue to decline by low-to-mid single digit, EBIT to be higher than FY18 (FY18 normalised EBIT: RM1,070mn), customer satisfaction measure at 74, and CAPEX as a percentage of revenue at ~18% (similar to FY18).

Meanwhile, management also alluded that in 2019 to 2021 it will continue to focus on 1) revenue preservation and uplift, 2) sustained profitability, 3) improved cash flow and 4) increased productivity while also focusing on 5) accelerating convergence, 6) simplification and digitalisation, and 7) leaner cost.

Shedding some light, management highlighted the group is orienting itself to be more customer centric (e.g., with optimised offerings to meet the demands of various users in the household) while also keeping a lid on investments (i.e., investing in network expansion only when feasible) and sweating existing assets.

Valuation

Our TP for TM is revised to RM2.15/share (previously RM2.10/share) based on DCF valuation with a WACC of 14.1% and long-term growth rate of 1.0%. Reiterate Sell. Key risks include heightening competition and unprecedented downtrading activities within the broadband segment.

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