Telekom Malaysia - Capital repayment, earnings outperformed BUY

• We raise Telekom Malaysia (TM) to a BUY and raise our fair value to RM5.50/share, following a stronger-than-expected 4Q11 results. TM also announced a capital reduction exercise enabling a special dividend payout of 30 sen/share. 

• The group reported a core net profit of RM240mil for its 4Q11, which brought full-year core earnings to RM634mil. This was ahead of both our, and consensus, expectations, accounting for 113% and 108% of full-year estimates, respectively. Following the stronger-than-expected results, we raise our FY12-13F earnings by 4%-14%, mainly to reflect higher Unifi subscription and Unifi ARPU as well as lower depreciation charges. 

• 4Q11 revenue grew 5% QoQ, led by growth in Unifi. Unifi subscriber base saw a 52K net addition in 4Q while ARPU remained stable at RM184/subscriber. As of Dec 2011, Unifi subscriber base stood at 236K.  Core earnings grew by a whopping 75% QoQ on the back of strong Unifi growth and lower depreciation charge. From 4Q11 onwards, the useful life of certain network assets had been extended to 20 years from 15 years previously. 

• TM’s 2012 KPI entails a 5% revenue growth (similar  to FY11 growth) but EBITDA margin is expected to fall to 32% (vs. 33% core EBITDA margin in FY11). Factors driving there assumptions are:- (1) Higher marketing cost and commissions, given expected higher competition; (2) higher maintenance cost for network equipment, given warranty expiration; (3) Higher content cost to beef up its Hypp.TV offering.

• On the bright side, management sees the potential for upselling its Unifi service as currently the majority of subscribers are on the most basic package (i.e. VIP5: RM150/month package for a maximum 60GB download/month). 

• Take-up rate for Unifi has accelerated to 20% against 1.16mil premises delivered in 2011 (vs. 16% as of 3Q11). Net additions improved from 17K/month (3Q11) to 24k/month (4Q11). Momentum is maintained since Dec 2011 at 23K/month net add, bringing the latest Unifi subscriber base to 283K. This compares well vs. the 2011 average net add of 17K/month.

• Beyond earnings fundamentals, we see room for dividend upside. Management has proposed a 30 sen/share special dividend by way of capital reduction off the current RM1/per share par value. This brings total FY11 dividend to 49.6 sen/share (9.8% dividend yield).

Source: AmeSecurities