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This article first appeared in The Edge Financial Daily on May 24, 2018

Telekom Malaysia Bhd
(May 23, RM4)
Downgrade to neutral with a lower target price (TP) of RM4.09:
Telekom Malaysia Bhd’s (TM) normalised earnings for first quarter of financial year 2018 (1QFY18) came in at RM105.3 million. This translates into a decrease of -54.2% year-on-year (y-o-y) compared with 1QFY17. The reduction in normalised earnings was mainly led by the decline in voice, data, and other telecommunications-related service revenues. On the contrary, the group’s operating expenses remained elevated. As a result, the group’s 1QFY18 profit margin contracted to 3.7% as opposed to the 7.8% achieved in 1QFY17. All in, TM’s 1QFY18 financial performance came in below our and consensus expectations, accounting for 11.2% and 12.2% of full-year FY18 earnings estimates, respectively.

As at 1QFY18, the total broadband customer base dwindled by -2.7% y-o-y to 2.31 million customers (1QFY17: 2.37 million customers). This was mainly caused by -18.8% y-o-y reduction in the Streamyx customer base to 1.13 million customers. Fortunately, the Unifi customer base expanded to 1.18 million customers (+20.2% y-o-y) as more customers were moving up the value chain with convergence.

At present, the convergence/TM households are at 45%. Meanwhile, Unifi average revenue per user (Arpu) remained resilient above RM190 per month.

TM eased its 1QFY18 capital expenditure (capex) to RM327 million (-7.1% y-o-y), which led to a lower capex-to-revenue ratio of 11.5% compared with the 11.9% recorded in 1QFY17. The bulk of the capex was utilised for expansion of network development for convergence. Currently, more than three million high-speed ports have been delivered. 1QFY18 capex included core network (17%), access (65%), and support systems (18%).

We reduce FY18 and FY19 earnings estimates to RM510 million and RM541.3 million, respectively, as we assume more conservative earnings contributions from voice, data, and other segments. Consequently, our FY18 and FY19 dividend estimates are reduced to 12.1 sen and 12.9 sen, respectively. We roll forward our valuation base year to FY19 and derive a new target price of RM4.09 (previously RM7.72).

The challenging market environment has negatively impacted the group’s voice, data, and other revenue. Fortunately, the Internet revenue continued to record good traction, which was mainly attributable to higher mix of Unifi customers and resilient Unifi Arpu. However, we are concerned about the group’s ability to manage its operating expenses efficiently. The cost as a percentage of revenue has increased steadily beyond 90% for the past few quarters. Due to the earnings pressure and the group’s capex commitment for long-term growth, we expect the dividend payment to decline as well. At this juncture, we view the dividend yield to hover around 3% only. Given the lack of strong positive catalysts, we downgrade our call recommendation to “neutral” from “buy” previously. — MIDF Research, May 23

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