Telekom Malaysia Bhd (Nov 29, RM3.39) Maintain hold at RM3.35 with target price of RM3.54: Telekom Malaysia’s 9MFY10 core net profit of RM324.5 million is in line with our expectations but below consensus, making up of 76.8% and 59.7% of full-year estimates respectively.

Despite launching Unifi in March, TM only started to bill its early customers in July, which explains the quarter-on-quarter (q-o-q) improvements in earnings before interest, tax, depreciation and amortisation (Ebitda) margins from 32% to 33.8%. TM also benefitted from lower outpayment cost from paying out lower interconnect rate of 5.0 sen/minute (from 8.5 sen per minute previously), although this was offset by content costs from its IPTV business.

Currently, TM has 21,000 Unifi subscribers, with another 8,000 firm orders. Positively, 30% of these subscribers are new TM customers, which is quite a high percentage. Management guided that as Unifi’s coverage area improves, the take-up rate will also increase accordingly. It expects a 20% to 30% Unifi subscriber compound annual growth rate (CAGR) over the next two years. The year 2011 will be a ramp-up year for Unifi, while 2012 will see significant revenue contribution from Unifi.

For now, TM plans to stick to its dividend policy of paying RM700 million or 90% of net profit, whichever is higher. Any changes in its dividend policy will only be considered after the announcement of its last quarter results. During the quarter, TM received RM252.1 million in proceeds and booked RM141.7 million of gain from the disposal of its 60 million shares in Measat. This has helped to boost its cash pile to RM3.80 billion (from RM3.60 billion in 2QFY10). Net gearing has fallen to 0.34 time, from 0.40 time in 2QFY10. It still has 193 million Axiata shares which it has yet to monetise.

We maintain our “hold” call with target price of RM3.54 using an unchanged dividend discount model (LT growth rate: 1.5%, WACC: 7%). — ECM Libra Investment Research