TM (FV RM5.90 - BUY) 1QFY12 Results Review: Still Good to Talk

TM’s results were in line with expectations, exhibiting encouraging revenue and EBITDA y-o-y growth of 11% and 8% respectively amid a seasonally soft quarter, which saw  voice revenue growing y-o-y for the  first  time  in many quarters. Management said it is monitoring Maxis’ ‘incursion’ into the FTTH space but feels that Unifi still offers a superior value proposition. While our FY12 projection is 7% below consensus, we make no changes to our forecast for now in anticipation of a challenging operating environment in 2H2012 from fresh competition and the stillsticky capex. Our FV of RM5.90 is premised on 6x FY13 EV/EBITDA. TM remains our top telco pick, following our recent downgrade on Axiata. Reiterate BUY.

Decent metrics  well in line. TM’s 1QFY12 core earnings (-24% q-o-q/+50% y-o-y) formed 25.3% of consensus estimates and was a slightly higher 27.2% of our forecast. This was  after  stripping off exceptional items, which included a forex gain of RM68m arising from the appreciation of the MYR on its USD debt and the last-mile broadband tax incentive booked in 4QFY11. We deem the results in line as 1Q opex tends to be the lowest as A&P spending (-29% q-o-q) is subdued. Overall, group revenue rose 11% y-oy but contracted 3% q-o-q, in line with the lumpy revenues recognized in the preceding quarter (mostly the MERS999 project). The bright spot  was again its Internet revenue, which grew by a robust 24.3% y-o-y (+ 4% q-o-q), thanks to strong Unifi take-up as we had highlighted earlier.  We note that voice revenue posted a surprising growth of 3% yo-y (+3.4% q-o-q) for the  first  time  in many quarters, which TM attributed to stronger bilateral voice sales to Tier-1 operators which are benefitting from the shift in voice traffic from VOIP carriers.

It’s Unifi vs Maxis. The ~365,000 activations to date (1.22m premises passed across 81 exchanges) imply that the strong momentum in Unifi additions continued into 2Q12, with  an  average 6k weekly additions over the past 8 weeks. Given Maxis’ recent aggressive FTTH promotions, there could be some downside to Unifi’s additions from 3QFY11 (Unifi subs exiting their 2-year contracts) but we think this should be offset by TM’s own promotion campaign to  lure  Streamyx subscribers to upgrade to Unifi. We believe P1 is unlikely to be a threat as it will focus on migrating its high ARPU mobile broadband users. TM believes Unifi still  represents a  good  value proposition to users (with  which we concur). It is looking to offer greater bandwidth for the same price to strengthen its position against its competitors.

Leveraging on ICT/BPO. TM aspires to be an ‘information exchange’ focusing  on ICT/business process outsourcing (parked under VADS) and  cloud computing going forward. We gather that VADS  contributed annual  revenue of RM600m to the group,with the BPO segment expected to grow 15%-20% in FY12

Source: OSK