Telekom Malaysia - Capital repayment, earnings outperformed BUY

Stock Name: TM
Company Name: TELEKOM MALAYSIA BHD

Research House: AMMB

Price Call: BUY

Target Price: 5.50

' We raise Telekom Malaysia (TM) to a BUY and raise our fairvalue to RM5.50/share, following a stronger-than-expected 4Q11 results. TM alsoannounced a capital reduction exercise enabling a special dividend payout of 30sen/share. 

' The group reported a core net profit of RM240mil for its 4Q11,which brought full-year core earnings to RM634mil. This was ahead of both our,and consensus, expectations, accounting for 113% and 108% of full-yearestimates, respectively. Following the stronger-than-expected results, we raiseour FY12-13F earnings by 4%-14%, mainly to reflect higher Unifi subscriptionand Unifi ARPU as well as lower depreciation charges. 

' 4Q11 revenue grew 5% QoQ, led by growth in Unifi. Unifi subscriberbase saw a 52K net addition in 4Q while ARPU remained stable atRM184/subscriber. As of Dec 2011, Unifi subscriber base stood at 236K.  Core earnings grew by a whopping 75% QoQ onthe back of strong Unifi growth and lower depreciation charge. From 4Q11onwards, the useful life of certain network assets had been extended to 20 yearsfrom 15 years previously. 

' TM's 2012 KPI entails a 5% revenue growth (similar  to FY11 growth) but EBITDA margin is expectedto fall to 32% (vs. 33% core EBITDA margin in FY11). Factors driving thereassumptions are:- (1) Higher marketing cost and commissions, given expectedhigher competition; (2) higher maintenance cost for network equipment, given warrantyexpiration; (3) Higher content cost to beef up its Hypp.TV offering.

' On the bright side, management sees the potential forupselling its Unifi service as currently the majority of subscribers are on themost basic package (i.e. VIP5: RM150/month package for a maximum 60GB download/month). 

' Take-up rate for Unifi has accelerated to 20% against 1.16milpremises delivered in 2011 (vs. 16% as of 3Q11). Net additions improved from17K/month (3Q11) to 24k/month (4Q11). Momentum is maintained since Dec 2011 at23K/month net add, bringing the latest Unifi subscriber base to 283K. Thiscompares well vs. the 2011 average net add of 17K/month.

' Beyond earnings fundamentals, we see room for dividend upside.Management has proposed a 30 sen/share special dividend by way of capitalreduction off the current RM1/per share par value. This brings total FY11dividend to 49.6 sen/share (9.8% dividend yield).

Source: AmeSecurities