KUCHING: Telekom Malaysia Bhd’s (TM) first quarter of 2015 (1Q15) came in below most analysts’ expectations due to cost pressures.
In a press release posted on Bursa Malaysia, TM noted that the reported group profit or profit after tax and minority interest (PATAMI) was RM128.9 million in the current year quarter.
“Group normalised PATAMI was lower by 7.6 per cent at RM171.3 million due to higher operating cost and consolidation of P1,” TM added.
According to the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research), even after adjusting for exceptional items equivalent to RM42.4 million, its normalised earnings were still lower than expected at RM171.3 million.
MIDF Research noted that the exceptional items mainly consist of unrealised foreign exchange (forex) loss on long term loans of RM41.2 million.
It added that the 7.6 per cent year on year (y-o-y) reduction in normalised earnings was mainly due to higher operating cost, forex losses and consolidation of P1.
The research arm of Maybank Investment Bank Bhd (Maybank IB Research) underlined that TM’s 1Q15 core net profit represented 18 per cent of both its and consensus’ full-year forecasts.
Maybank IB Research noted that the miss was primarily due to higher-than-expected costs for the quarter (direct costs and manpower in particular).
In contrast, the research arm of Affin Hwang Investment Bank Bhd (AffinHwang Research) noted that TM’s 1Q15 results were broadly within its and consensus expectations, as core net profit accounted for 17 per cent and 18 per cent of full-year estimates respectively.
AffinHwang Research noted that earnings tend to be stronger in the second half (2H) upon recognition of lumpy contributions from other businesses. As such, the research arm maintained its ‘hold’ rating on TM with an unchanged discounted cash flow (DCF) derived target price of RM6.98.
“While TM’s revenue growth remains strong, we view P1 as a potential wildcard that could drag down on TM’s earnings in the short term,” it said.
AffinHwang Research noted that key upside risks include positive earnings surprises and positive dividend surprises while downside risks include larger-than-expected losses from P1 and sharper competition in the internet segment.
While P1 likely contributed to the margin erosion, Maybank IB Research noted there is also an element of timing behind the cost pressure (costs for managed projects are usually front-loaded).
The research arm’s earnings were thus unchanged for now.
Maybank IB Research’s ‘hold’ rating and target price of RM7.30 was also left unchanged.
It valued TM on a DCF, assuming 7.4 per cent weighted average cost of capital (WACC) and one per cent long-term growth.
The research arm’s target price implied 28-fold price earnings ratio (PER), 7.9-fold equity value (EV)/earnings before interest, tax, depreciation and amortisation (EBITDA) and 3.2 per cent net dividend yield in 2015.
Similarly, MIDF Research maintained its revenue forecasts for financial year 2015 (FY15) and FY16.
“However, we are assuming higher operating costs for FY15 and FY16 to better reflect 1Q15’s operating costs trend,” it said.
All in, the research arm lowered its earnings estimates for FY15 and FY16 by 12.4 per cent and 7.8 per cent respectively.
MIDF Research rolled forward its valuation base year to FY16 and derive a new target price of RM7.80 per share from RM7.43 per share previously, based on Dividend Discount Model valuation methodology.
Its target price implied a forward FY16 PER of 29.8-fold.
On a side note, the research arm said that despite lower revenue contribution from the voice segment, revenue growth from non-voice segment remains encouraging.
It noted that this is supported by the expanding broadband customer base and higher average revenue per user (ARPU).
In addition, MIDF Research viewed that the high speed broadband (HSBB) phase 2 and sub-urban broadband (SUBB) projects will further boost TM’s broadband coverage area while offering higher internet surfing speed.
“However, we opine that growth for future dividend payments might be capped in view of the upcoming mega projects,” the research arm said said.
All in, MIDF Research reiterated its ‘neutral’ recommendation on TM.