• Keep NEUTRAL and DCF-derived MYR4.35 TP, 16% upside and c.4% yield. Results were broadly in line, with stronger home fibre revenue overshadowed by weak core mobile revenue. The lowered EBIT guidance suggests market expectations on merger synergies may be overly optimistic, in our view. Our forecasts are pending review post results call. Key risks are competition, weaker-than-expected synergies and regulatory setbacks.

• Broadly in line. 2Q24 earnings of MYR406m (+8% QoQ/+18% YoY) brought 1H23 core earnings to MYR782.5m (+18% YoY), at 48% of our, but trailed consensus estimates (45%), which has likely excluded the impact of accelerated depreciation (the bulk of which has been booked in 1Q24). An interim 3.5 sen DPS has been declared, taking 1H25 DPS of 7 sen (105% DPR).

• Service revenue down 0.5%; EBIT up 2.8% in 1H24. Stronger fibre broadband (FBB) growth (+18%) from upselling activities was overwhelmed by weaker core mobile revenue (-1.3% YoY) while EBIT rebounded 14% QoQ due to the MYR139m in voluntary separation (VSS) cost booked in 1Q24. This contributed to the 8% QoQ earnings uplift despite the higher tax expense with some green tax incentives recognised.

• Prepaid still weak; stronger fibre broadband (FBB) sales. Prepaid subs net- deletion has more than doubled QoQ with high SIM-only rotational churn. This led to prepaid revenue falling for the second quarter in a row (-3% YoY) and offsetting the 0.6% QoQ uplift in postpaid revenue (+0.5% YoY), resulting in a marginal 0.1% QoQ decline in mobile revenue. Note that MYR34m in interest revenue from bundled device contracts has now been classified as postpaid revenue. Excluding this, postpaid revenue fell 1% YoY (+0.6% QoQ).

• Lower EBIT guidance = lower synergies expected in 2H24? While management has maintained the guidance on service revenue, it now expects FY24F EBIT to decline by single digit (vs flat previously) after factoring in the impact of the earlier VSS. This implies a 6-8% YoY contraction in 2H24 EBIT and could suggest merger synergies potentially falling short of expectations (likely backloaded into FY25F), in our view. Our forecast and TP are maintained pending the results call later today.

• Vying for second 5G network. CDB has submitted its tender for the second 5G network/spectrum alongside Maxis (MAXIS MK, NEUTRAL, TP: MYR4.00), TM and U-Mobile. MNOs will be assessed based on a set of criteria (beauty contest) that includes network infrastructure/rollout track record, financial considerations and technical experience amongst others, with the outcome likely to be known by end-3Q24. We see 5G network collaborations being forged to defray the cost of rollout which would be based on commercial considerations. The regulator is expected to rescind the 5G spectrum exclusivity accorded to Digital Nasional Berhad (DNB), with half of the 5G spectrum re-assigned to the second network provider.

Source: RHB Research - 19 Aug 2024