Telekom Malaysia (TM) reported 1H16 net profit of RM461.9m (+35% YoY). After stripping out unrealised forex loss on trade settlement, fair value gain on investment and unrealised forex gain on borrowings, core net profit stood at RM370.5m (-10% YoY). The results were below expectations, accounting for only 41% and 42% of our and market full-year forecasts. The main discrepancy is the write-off of Webe’s Wimax assets and accelerated depreciation amounting to RM111.8m in 1H16. We have highlighted earlier that Webe could potentially post earnings risk to the group as it enters more aggressively into the mobile business. We are factoring in Webe’s write-off and higher cost into our FY16-18F forecasts, resulting in a 4-10% decline in earnings. As such, our DCF-based TP is reduced to RM5.95 (from RM6.20 previously), maintain Underperform. An interim dividend of 9.3sen was declared (1H15: 9.3sen).

2Q16 revenue increased by 7.2% YoY. The increase in operating revenue was mainly driven by higher contribution from internet, data and other services. Total broadband customers improved by 3.4%, attributed to higher subscription for Unifi (+15% YoY). However, this was partly offset by a 2.7% decline in Streamyx subscriber base. Unifi ARPU rose by RM4 to RM94 while Streamyx ARPU improved by RM3 to RM89. Data revenue was largely boosted by higher IRU and domestic ethernet contribution.

Bottomline hit by write-off of Wimax assets at Webe. 2Q16 normalised net profit fell by 27.5% YoY to RM167.5m. This was mainly due to accelerated depreciation and write-off of Wimax assets at Webe, which amounted to RM63.4m. Meanwhile, total cost as a percentage of revenue was slightly higher at 90.9% (2Q15: 89.4%) due to increase in international outbound, outsourcing cost at VADS, material cost and A&P cost at Webe.

Maintain Underperform. After factoring in the write-off of Webe’s Wimax assets and higher operating cost, our FY16-18F earnings is reduced by 4-10%. As a result, our DCF-based TP is cut from RM6.20 to RM5.95. Over the next 2-3 years, we believe Webe will continue to be a drag to the group’s earnings due to its entry into the competitive mobile market. Additionally, we reckon there is room for marketing and depreciation cost to rise as TM invest more aggressively into expanding its mobile subscriber base and network infrastructure. Trading at 29x FY17 EPS, TM remains the most expensive stock in the telco sector.

Source: PublicInvest Research - 1 Sep 2016