Telekom Malaysia (KE)

Event

TM’s 3Q11 results were above expectations at the core level, led by strong broadband-related contributions. We raise our FY11-12 forecasts by 11% and 15%, respectively, as we factor in the Axiata share sale gain as well as higher Internet contributions over the next two years. In addition, we lower our beta assumption from 0.9x to 0.86x, in line with recent lower volatility for dividend stocks. Our DCF-derived valuation target for TM thus increases from RM4.60 to RM4.84. Maintain BUY.

Our View

Strong performance at core level. After removing the non-operational and unpredictable items, such as a RM122m unrealised forex loss on long-term US$-denominated bonds, a RM278m gain on the sale of Axiata shares, and a RM60m provision to write off obsolete copper PSTN network assets as TM migrates to an all-IP core network, we estimate 3Q11 core net profit rose by 44.5% YoY to RM182m, well above our expectation of a 20% increase.

Margins continued to surprise on the upside. As alluded to last quarter, TM managed to keep margins on the boil with EBITDA margin reaching 34.6% in 3Q11, driven by strong Internet revenue growth as Unifi accelerated its run rate to add 55,400 subscribers in 3Q11. At 33.7%, 9M11 EBITDA margin is well above earlier guidance of 32%, and management expressed optimism that 4Q margin should be maintained, at the least.

Fixed broadband, especially Unifi, giving TM a new lease of life. Unifi is more than delivering on its earlier potential. As at end-3Q11, TM has signed up 164k subscribers with stable ARPU of RM184 a month and the take-up is still accelerating (run rate so far in 4Q11 is 18.8k vs 3Q run rate of 18.5k). In fact, Unifi is now EBITDA positive. Also, TM has almost the whole field to itself as competitors are still sorting themselves out and rival products are not expected to hit the market until 2H12, at this stage.

Action & Recommendation

Maintain BUY on TM for its increasingly attractive growth profile and appealing dividend yield of 5.9%. TM offers a unique blend of growth and defensive characteristics for investors as superfast broadband gives it a new lease of life.