Telekom Malaysia - A Subdued 1Q2012

TM’s 1QFY12 results, due to be announced by month-end, will exhibit the typical seasonal weakness, with q-o-q contractions in revenue and earnings following the high base in the Dec quarter. That said, demand for its Unifi product continued to be robust, with management’s relatively conservative projection likely to be met in July. We retain our BUY call, based on a FV of RM5.90. The share price re-rating catalysts are: (i) the better-than-expected Unifi numbers, and (ii) stronger than expected results. TM is our top sector pick, followed by Axiata.

Seasonally slow start. TM will announce its 1QFY12 results on 30 May, to be followed by an investor conference call. Its numbers should reflect the fewer working days during the quarter and the high base effect of 4QFY11. We expect group revenue to contract 4-6% q-o-q to some RM2.3bn (+7-9% y-o-y), due largely to muted voice revenue and the absence of lumpy items. This should be partially mitigated by the strong growth in internet and multimedia revenue, the key revenue driver, as Unifi continued to see robust take-up. TM’s EBITDA margin is likely to improve  q-o-q from 32.5% in 4QFY11 due to the higher costs booked in the preceding quarter. We believe  that  wholesaling revenue from HSBB access seekers remains small, with P1 only launching its home product in March and the little traction achieved by Maxis thus far, based on our channel checks.  

2012 Unifi target a foregone conclusion. TM closed 1QFY12 with some 315,000 Unifi customers, which imply that the strong 6k/weekly additions recorded in 4QFY11 continued into the March quarter. We gather that gross activation crossed 350,000  in mid-May, translating into an average 875 installations/day, similar to the average 870/day chalked up in 1QFY12. The continuing strong demand  was partly aided by its ‘Super Speed Me’ promotion, which  gave  Streamyx users upgrading to a Unifi plan savings on upfront subscription for 3 months. If the current  run-rate is sustained, TM’s target of 400,000 by year-end is a foregone conclusion. Our forecast  has  built in a doubling of Unifi subscribers y-o-y to 500k by end-2012. Outside Unifi areas, TM is still recording high single digit growth in its Streamyx base y-o-y.

Capital repayment. At  the company’s  recent EGM, TM shareholders approved the payment of a final DPS of 9.8 sen/share (to be paid on 8 June) for FY11, and  a  30 sen/share capital repayment, to be  paid by August. We project TM’s FCF yield to expand from 6.6% in FY12 to 8.6% and 9.2% in FY14, giving rise to potential for further capital management. Based on precedence, major cash distributions typically took place after the monetization of non-core assets, the bulk of which was completed over the last 2 years. We think management may take a re-look at its dividend policy (min. RM700m or 90% of core PATAMI, whichever is higher) to sustain the generous cash payouts of over 100% going forward.  

Source: OSK