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TM’s 1Q19 core PATAMI of RM296m (+180% QoQ and YoY) was a major positive surprise due to operational excellence. EBITDA margin improved significantly by 9ppt QoQ and 11ppt YoY to 39% with cost savings achieved on almost every cost items. UniFi’s net adds showed resilience at the expense of ARPU and Streamyx’s attrition. FY19 guidance was unchanged and will continue to emphasize on cost rationalization. Upgrade to BUY with higher DCF-derived TP of RM3.81.

Exceeded expectations. 1Q19 revenue of RM2.8bn translated into a core net profit of RM296m (circa +180% QoQ and YoY), beating our and consensus estimates at 47% and 49%, respectively. The major positive surprises were lower-than-expected cost structure and D&A despite the MFRS 16 adoption.

Dividend. None (1Q18: None).

QoQ. Due to seasonal weakness, top line fell -10% as the flattish Data contribution was weighed down by Voice (-17%), Internet (-3%) and Others (-25%). Nonetheless, core net profit nearly tripled to RM296m as a result of fruitful cost rationalization where direct cost (webe’s domestic roaming on Celcom, dealer commission and content) and other opex (A&P and site rental) fell by -32% and -34%, respectively. D&A was lower by -16% on the back of smaller asset base after major impairment in FY18.

YoY. Revenue softened by 2% as the declines in Voice (-11%) and Internet (-4%) erased the growth in Data (+7%) and Others (+2%). In terms of cluster, only TM Global gained with 15%, followed by flattish TM ONE, while unifi and Others declined by 9% and 10%, respectively. Similarly, core net profit grew by almost 3 fold for the same reasons mentioned above.

UniFi. Added 25k subs in 1Q19 elevating total base to 1.3m, representing 41% take up rate on the back of 3.2m high speed broadband ports. ARPU continued to reflect the major price adjustment by further decrease by RM5 QoQ to RM179.

Streamyx. On the contrary, copper broadband continued to experience churn albeit at a slower rate of 64k subs (4Q18: 89k) and ended 1Q19 with a base of 872k. At the same time, ARPU was relatively stable at RM87 (-RM1 QoQ).

Upgrade programme. Completed in Apr 2019 with (1) 973k subs upgraded to 10x existing speed; (2) migrated 266k Streamyx subs to fibre; and (3) upgraded 226k Streamyx subs in non-unifi zone to 2x existing speed where technology permits.

FY19 guidance. Despite the outperformance, TM kept its initial guidance claiming that it is still early days, as such (1) revenue growth to be low to mid-single digit decline; (2) absolute EBIT to be higher than FY18 level at circa RM1bn; and (3) capex to match FY18’s or 18% of revenue.

Forecast. We raise FY19-20 EPS by 41% and 36%, respectively incorporating the new run rate of the cost structure. Upgrade to BUY after raising our DCF-derived fair value to RM3.81 (was RM2.89) with WACC of 8.5% (previously 7.5%) and TG of 0.5%. Although market competition remains intense with more players after HSBB MSAP, we are particularly positive on its cost optimization measures which now yielding impactful outcome. With earnings return to growth trajectory, dividend will follow through, which is currently projected with a decent 3.4% return.

Source: Hong Leong Investment Bank Research - 31 May 2019

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