30 August 2017 2QFY17 Results Review Telekom Malaysia Berhad Unifi customer base crossed one million INVESTMENT HIGHLIGHTS 2Q17 normalised earnings grew by +24.2%yoy due to healthier normalised PATAMI margin 1H17 financial results came in as expected Higher proportion of Unifi customer (42.7% of total broadband customer base) lifted ARPU to RM200/mth Maintain BUY on TM with an unchanged higher target price of RM7.77 per share Healthier profit margin. Telekom Malaysia Bhd s (TM) 2Q17 normalised earnings amounted to RM208.0m (+24.2%yoy). Despite a marginal contraction in revenue of -2.1%yoy due to lower topline contribution from managed accounts, the normalised PATAMI margin expanded to 7.0% from 5.5% as at 2Q16. This was mainly driven by lower effective tax rate of 35.1% as compared to 49.6% as at 2Q16 as well as lower depreciation and amortisation charges (-11.2%yoy). 1H17 earnings came in as expected. The strong 2Q17 financial results led to higher 1H17 normalised earnings of RM437.8m (+18.2%yoy). This came in within ours and consensus expectations, accounting for 48.7% and 51.5% respectively of full year FY17 earnings estimates. Broadband. As at 2Q17, the customer base remained resilient at 2,326k customers (-0.3%yoy). Nonetheless, TM managed to grow its Unifi customer base to more than one million (+11.9%yoy) which constitutes 42.7% (2Q16: 38.1%) of total broadband customer base. In addition, approximately 90% of the Unifi customers are on broadband packages of at least 10mbps. These factors has led to higher 2Q17 ARPU of RM200/mth from RM194/mth as at 2Q16. Capital expenditure (capex). TM eased its capex spending in 2Q17 to RM547m, a decline of -11.8%yoy. This was mainly due to lower capital spending on network access (-31.7%yoy). Cumulatively, the group s 1H17 capex dropped by -4.2%yoy to RM899m which translates into to lower capex-to-revenue ratio of 15.1% (1H16: 15.9%). Dividend. The group declared a first interim dividend of 9.4sen or RM353.2m in 2Q17. This is slightly higher as compared to 9.3sen declared in 2Q16. Maintain BUY Unchanged Target Price (TP): RM7.77 RETURN STATS Price (29 th August 2017) Target Price RM6.42 RM7.77 Expected Share Price Return +21.0% Expected Dividend Yield +3.5% Expected Total Return +24.5% STOCK INFO KLCI 1,761.14 Bursa / Bloomberg Board / Sector Syariah Compliant 4863 / T MK Main/ Services Yes Issued shares (mil) 3,757.9 Market cap. (RM m) 24,125.9 52-wk price Range RM5.81 RM6.90 Beta (against KLCI) 0.63 3-mth Avg Daily Vol 2.9m 3-mth Avg Daily Value Major Shareholders (%) RM18.7m Khazanah 26.21 ASB and its associated funds 18.38 EPF 17.71 KWAP 4.10 MIDF RESEARCH is a unit of MIDF AMANAH INVESTMENT BANK Kindly refer to the last page of this publication for important disclosures
Impact. We are keeping our earnings estimates unchanged at this juncture. Target price. We are maintaining our target price of RM7.77 per share based on based on Dividend Discount Model valuation methodology. Maintain BUY. Despite the challenging market environment, we are comforted by the fact that UniFi s customer base and ARPU continue to increase at a steady pace. Moving forward, we view that the progressive growth in TM s broadband customer base would be further driven by the HSBB phase 2 and SUBB projects. Coupled with generous capex undertaking, TM would be able to remain committed to its pledge of providing higher speed broadband access more affordable to the masses. On the mobility segment, the group s target to launch Webe s new prepaid plan in 2H17 remains intact. We opine that the quad-play offering would further strengthen TM s position in the telecommunication industry. All factors considered, we reiterate our BUY recommendation on TM. DIVIDEND DISCOUNT MODEL ASSUMPTIONS Expected market return 10.0% Risk free rate 4.0% Beta 0.7 Terminal growth 5.5% Cost of equity 8.4% INVESTMENT STATISTICS FYE 31 st Dec 2015 2016 2017F 2018F Revenue (RM m) 11,721.6 12,060.9 12,453.6 12,913.3 EBIT (RM m) 1,239.7 1,185.4 1,209.5 1,252.6 PBT (RM m) 1,115.2 1,018.0 1,028.4 1,082.6 Normalised PATAMI (RM m) 894.9 847.9 899.8 945.5 Normalised EPS (sen) 24.2 22.6 23.9 25.2 EPS growth (%) -6.6-6.6 6.0 5.1 PER(x) 26.5 28.4 26.8 25.5 Net Dividend (sen) 21.4 21.5 21.8 22.5 Net Dividend Yield (%) 3.3 3.3 3.4 3.5 2
DAILY PRICE CHART Martin Foo Chuan Loong martin.foo@midf.com.my +603 2173 8354 TELEKOM MALAYSIA: 2Q17 RESULTS SUMMARY (All in RM m unless stated otherwise) Quarterly Results FYE 30 th June 2Q17 YoY (%) QoQ (%) 2017 2016 YoY (%) Revenue 2,980.2-2.1 0.5 5,944.8 5,900.8 0.7 Normalised EBITDA 902.0-3.6-5.8 1,859.7 1,890.9-1.7 Normalised EBIT 304.5 15.8-2.4 616.4 575.0 7.2 EBIT 257.1-8.5-15.4 560.9 561.0 0.0 Other gains/losses 1.1 n.m. n.m. -3.6 49.4 n.m. Net finance cost -25.2-72.7-39.6-66.9-35.6 87.9 Associate income 8.2-1.2 30.2 14.5 14.3 1.4 PBT 241.2 23.1-8.5 504.9 589.1-14.3 Taxation -84.7-12.9 6.8-164.0-199.9-18.0 MI 54.0 32.4 17.4 100.0 72.7 37.6 PATAMI 210.5 50.9-8.6 440.9 461.9-4.5 Normalised PATAMI 208.0 24.2-9.5 437.8 370.5 18.2 EPS (sen) 5.52 23.8-9.6 11.6 9.9 17.8 +/- ppts +/- ppts +/- ppts Normalised EBITDA margin (%) 30.3-0.5-2.0 31.3 32.0-0.8 Normalised EBIT margin (%) 10.2 1.6-0.3 10.4 9.7 0.6 Normalised PATAMI margin (%) 7.0 1.5-0.8 7.4 6.3 1.1 Effective tax rate (%) 35.1-14.5 5.0 32.5 33.9-1.5 3
APPENDIX Table 1: 1H17 revenue breakdown by product category Product Revenue (RM m) % YoY Remarks Voice 1,587-5.1 - Decreased traffic minutes across customer clusters and lower cumulative DEL customers Internet 1,952 +8.5 - Higher UniFi and IPTV content revenue Data 1,326-1.9 Others 1,080 +0.1 - Lower IRU and IPVPN revenue partially offset by higher international and domestic leased revenue - Higher customer projects and ICT/BPO revenue, partially offset by lower tuition fees and reduction in revenue recognition from property development Table 1: 1H17 revenue breakdown by customer clusters Cluster Revenue (RM m) % YoY Remarks Mass Market Managed accounts 2,615 +3.7 - Driven by UniFi and IPTV content revenue - Lower revenue from government projects, partilally offset by higher ICT/BPO 2,138-2.6 revenue and broadcast revenue Global & Wholesale 938 +1.7 - Steady contribution from international leased, domestic leased and wholes Ethernet revenue Others* 254-3.1 - Lower contribution from tuition fees and revenue recognition on share of GDV of property development * Others include revenue from property development, TM R&D, UTSB and MKL. 4
MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad (23878 - X). (Bank Pelaburan) (A Participating Organisation of Bursa Malaysia Securities Berhad) DISCLOSURES AND DISCLAIMER This report has been prepared by MIDF AMANAH INVESTMENT BANK BERHAD (23878-X). It is for distribution only under such circumstances as may be permitted by applicable law. Readers should be fully aware that this report is for information purposes only. The opinions contained in this report are based on information obtained or derived from sources that we believe are reliable. MIDF AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or implied, as to the accuracy, completeness or reliability of the information contained therein and it should not be relied upon as such. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. All opinions and estimates are subject to change without notice. The research analysts will initiate, update and cease coverage solely at the discretion of MIDF AMANAH INVESTMENT BANK BERHAD. The directors, employees and representatives of MIDF AMANAH INVESTMENT BANK BERHAD may have interest in any of the securities mentioned and may benefit from the information herein. Members of the MIDF Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein This document may not be reproduced, distributed or published in any form or for any purpose. MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS STOCK RECOMMENDATIONS Total return is expected to be >15% over the next 12 months. BUY TRADING BUY NEUTRAL SELL Stock price is expected to rise by >15% within 3-months after a Trading Buy rating has been assigned due to positive newsflow. Total return is expected to be between -15% and +15% over the next 12 months. Total return is expected to be <-15% over the next 12 months. TRADING SELL Stock price is expected to fall by >15% within 3-months after a Trading Sell rating has been assigned due to negative newsflow. SECTOR RECOMMENDATIONS POSITIVE The sector is expected to outperform the overall market over the next 12 months. NEUTRAL The sector is to perform in line with the overall market over the next 12 months. NEGATIVE The sector is expected to underperform the overall market over the next 12 months. 5