This article first appeared in The Edge Financial Daily on September 5, 2017

Telekom Malaysia Bhd 
(Aug 30, RM6.43)
Maintain hold with a higher target price of RM6.80: Telekom Malaysia Bhd’s (TM) earnings before interest, taxes, depreciation and amortisation (Ebitda) for the second quarter of financial year 2017 (2QFY17) eased 3.6% year-on-year (y-o-y) (-5.8% quarter-on-quarter [q-o-q]) on lower revenue and margins. Core earnings per share (EPS) jumped 24.2% y-o-y (-9.5% q-o-q), mainly due to the low base in 2QFY16 (hit by high accelerated depreciation/write-offs of WiMAX assets and a higher effective tax rate). Results were within expectations, with core EPS for the first six months of FY17 (1HFY17) forming 50.1% and 51.3% of our and Bloomberg consensus FY17 forecasts (Ebitda: 48.2%/47.2%) respectively. A dividend per share of 9.4 sen (1HFY16: 9.3 sen) was declared, implying an 81% payout.

2QFY17 revenue fell 2.1% y-o-y due to lower voice (-4.7% y-o-y), data (-6.4% y-o-y) and other services (-9.5% y-o-y). The latter two were due to lesser government projects (austerity drive) and managed account business (affected by TM’s own reorganisation exercise). The revenue fall was partially buffered by the growth in Internet and multimedia (+8.5% y-o-y). Q-o-q, revenue rose 0.5% after a seasonally weaker 1QFY17, albeit partly offset by the continued fall in voice revenue (-2.5% q-o-q).

UniFi net adds were largely sustained at 28,000 (1QFY17: +30,000), as TM expanded its number of high-speed broadband ports by 4.2% q-o-q to 2,700,000. UniFi’s average revenue per user (Arpu) held steady q-o-q (+3% y-o-y) at RM200 in 2QFY17, with 88% of subscribers on 10Mbps and above (1QFY17: 81%). The number of Streamyx subscribers fell 39,000 (-2.8% q-o-q), its steepest in 11 quarters and exceeded the net adds recorded under UniFi. Besides migration to UniFi, we believe subscribers possibly churned to other fixed/mobile broadband providers. Arpu was stable q-o-q (+1% y-o-y) at RM90.

The Ebitda margin eased marginally by 0.5 percentage point (ppt) y-o-y (-2.0 ppts q-o-q) to 30.3% in 2QFY17. This was mainly due to higher webe site rentals with expansion in LTE sites. Supplies and material costs also rose due to one-off projects at TM One and higher customer premise equipment replacement cost due to the UniFi speed upgrade exercise. These were cushioned by lower marketing cost (lower dealer commissions) and reduced bad debts (better credit management and collection activities).

We tweak our earnings forecasts slightly to reflect bookkeeping changes. We forecast muted revenue growth this year due to lower government/enterprise ICT spending. However, we see FY17 core EPS rise 4.3% y-o-y due to lower WiMAX asset write-offs. We expect net profit to rise 7% y-o-y in FY18 on stronger revenue growth, but fall 6.0% y-o-y in FY19 as we factor in a 20% effective cut in UniFi Home prices. — CIMB Research, Aug 30