Telekom Malaysia - Gaining Trust

TM delivered another solid quarter, posting the highest PATAMI growth since FY09 while revenue growth continued to trump its own low-balled KPI target. Still, it remains conservative and opts to maintain its guidance for the full year, citing potentially higher costs in 2H2012. We expect the group to remain vigilant on costs and capex and are leaving our recently upgraded forecast and FV of RM7.00 unchanged, pegged to 7x FY13 EV/EBITDA. TM remains our top pick for Malaysia telecoms, with potential upside surprises in earnings and dividends as catalysts.

Another strong quarter. TM’s 1HFY12 core earnings (stripping out EIs and a RM188m broadband tax incentive in 2Q12) and revenue of RM406.4m and RM4.81bn exhibited solid 58% y-o-y (+21.6% q-o-q) and 9.7% y-o-y (+2% q-o-q) growth respectively. The results were broadly in line, forming 49% of our estimate but were some 10% above consensus estimate. Overall growth continued to be driven by its internet and data businesses, which advanced 19.3% y-o-y and 10.3% y-o-y in 2Q12 while voice was stable. The group’s EBITDA margin was relatively steady at 32.1% q-o-q. As expected, a 9.8 sen/share DPS was declared (payable on 14 Sept), reflecting a payout of 86%. 

Knowing broadband best. TM added 68k (5.6/weekly) new Unifi subscribers in 2Q2012 to 384,000, below the record 79k (over 6k/weekly) recorded in 1Q2012 as Maxis entered the market in June by undercutting prices on its packages and throwing in higher bandwidth. However, the monthly new Unifi subscriber run-rates do not appear to have been impacted by competition as the July addition of 29k showed a slight increase over 28k in June. With the shorter month of Aug and public holidays resulting in leading a lower 21k additions month to date, TM’s weekly run-rate has remained relatively robust at over 5k. Having met its previous full-year target 5 months ahead, TM is now aiming for 500k Unifi subs by end-2012, which is consistent with our projection.

Beefing up HyppTV. TM spent RM43m in content for Unifi in 1H2012 and expects a higher quantum of spending in 2H2012. It will be adding Chinese and sports content and does not rule out a joint bid for the rights to the BPL. Unlike Singtel which needs the BPL to sustain its IPTV business, we think TM is not hard-up for iconic content.

More dosh in store? TM downplayed the prospects of higher dividends going forward, citing investments needed for its business. We think there is certainly scope for management to return more cash, going by the falling capex/sales (declining HSBB spending) and improved free cash yields, projected at over 6-8% by FY13/14. Assuming a longer-term gross debt/EBITDA target of 2.5x, we estimate scope for additional 30 sen/share to be returned on top of its recurring DPS of 20 sen/share, being its minimum guidance. 

Source: OSK