TM to report earnings growth in 3Q despite revenue concerns

The telecommunication giant has managed to maintain its cost structure for 2Q after reduced costs substantially in 1Q

by MARK RAO/ pic by MUHD AMIN NAHARUL

TELEKOM Malaysia Bhd’s (TM) improved cost structure should sustain the company’s profitability for the third quarter (3Q), but revenue will remain challenging on continued pricing pressures.

The telecommunication giant managed to maintain its cost structure for the 2Q which ended in June 30 this year after reduced costs substantially in 1Q, a local industry analyst said.

This helped the company to grow its net profit for the first half of the year (1H19) by 63% year-on-year (YoY) to RM422.46 million, despite noting lower revenue and recognising impairment loss on network assets over the 1H19 period.

“The cost structure is expected to be the run rate going forward for the company, with cost coming in more or less at the same level even as capital expenditure (capex) inches higher,” the analyst, who asked to remain anonymous, told The Malaysian Reserve (TMR).

The capex increases as the company introduces new packages across its operating segment.

However, the analyst said revenue growth is an ongoing concern as TM’s strategy to bring down prices to retain and protect its customer base will adversely impact average revenue per user (ARPU).

Despite registering improved profitability in 1H19, the company saw its revenue dip by 4% YoY to RM5.55 billion on lower contributions from all lines of products except data services.

The company will navigate the challenges posed to its revenue growth via a stronger customer focus, MD and group CEO Datuk Noor Kamarul Anuar Nuruddin said.

At the same time, the cost optimisation efforts will keep the company’s profitability momentum going, he said in a statement on TM’s 2Q19 performance.

Unifi, TM’s broadband business, remains the group’s largest revenue contributor.

Recently, the company streamlined all Streamyx packages to a new unifi Lite plan at a discounted RM69 per month for existing customers.

It further lowered the cost of its unifi Mobile — the company’s mobile broadband service — package to RM59 per month from RM99 per month as part of a promotional campaign ending in December.

Management has indicated that the company’s long-term earnings stability depends on how fast it improves its mobile services.

The analyst who spoke to TMR said these initiatives will initially weigh down TM’s revenue, especially for 4Q19, but are likely part of the company’s mid-to long-term strategy to improve its customer retention.

Last year was a challenging year for TM as the company was pressured to lower its broadband prices, while leadership uncertainties at the time and intense competition in the market created a challenging outlook for the firm.

The company’s shares lost 58% in value in 2018, effectively erasing close to RM14 billion from its market capitalisation.

This resulted in TM falling out of the country’s benchmark FTSE Bursa Malaysia KLCI (FBM KLCI), which comprises the top 30 listed corporate based on market capitalisation, last year.

But the company reversed some of its losses in 2019. Its shares are up 38.3% year-to-date, recovering RM3.84 billion in market capitalisation to rank the firm as the 30th largest-capped company on the local stock exchange.

The rally was largely driven by the company’s 1Q19 performance which registered a 96% jump in net profit, sending TM’s shares 27.2% higher overnight on May 30.

A strong finish to the year will likely see TM returning to the FBM KLCI, but this is contingent on whether the company can start showing growth in revenue.

Analysts tracked by Bloomberg have a consensus one-year target price of RM3.94 on the stock — a potential upside of 7%. TM is scheduled to release its 3Q19 results on Thursday.