PP 7767/09/2010(025354)

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

Re su l ts / Briefing Note 31 May 2010

MARKET DATELINE

Share Price : RM3.26

TM Fair Value
Recom
:
:
RM3.55
Market Perform
No Commitment On Capital Management Yet (Maintained

Table 1 : Investment Statistics (TM; Code: 4863) Bloomberg: T MK

Net Core EPS Net
FYE Turnover profit EPS EPS# Growth# PER# C.EPS* P/NTA Gearing ROE NDY
Dec (RMm) (RMm) (sen) (sen) (%) (x) (sen) (x) (x) (%) (%)
2009 8,608.0 643.0 18.2 13.3 (41.8) 24.6 - 1.8 0.5 5.4 5.7
2010f 8,811.7 441.6 12.5 12.5 (6.1) 26.2 15.2 1.9 0.8 6.4 5.7
2011f 9,132.2 478.0 13.5 13.5 8.2 24.2 16.3 2.0 0.7 7.2 5.7
2012f 9,402.7 561.0 15.8 15.8 17.4 20.6 17.2 2.0 0.8 8.7 5.7
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC # Excludes EI * Consensus Based On IBES Estimates

♦ 1Q10 missed expectations. 1Q10’s core net profit of RM92.7m (-53.6%

RHBRI Vs.
Above
Consensus

yoy; -5.0% qoq) came in below expectations, accounting for only 19.3% of
In Line
our and 16% of consensus full-year estimates respectively. The key Below
variances were: 1) lower-than-expected other operating income; and 2)
Higher-than-expected effective tax rate (ex-EI) of 32.3% vs. our full-year Issued Capital (m shares) 3,577.4
assumption of 26%. However, 1Q10 revenue was in line with our estimate. Market Cap (RMm) 11,662.3
Daily Trading Vol (m shs) 7.1
♦ 1Q10 revenue declined by 6.5% qoq to RM2,124.9m and this was 52wk Price Range (RM) 2.60 – 3.56
mainly due to lower voice revenue (-1.7% qoq), data and leased revenue Major Shareholders: (%)
Khazanah Nasional 41.8
(-6.8% qoq, led by the global division) and other revenue (-25.6% led by
EPF 12.4
the retail division), which more than offset the higher internet revenue
Amanah Saham B’putra 8.3
(+5.2%, in line with the higher net adds of 54k in 1Q10). Despite EBITDA
declined by a slower pace of 5.6% qoq, as EBITDA margin increased by FYE Dec FY10 FY11 FY12
0.7%-pt qoq to 33.2% mainly due to lower: 1) Supply and material costs EPS chg (%) (7.8) (6.5) (4.9)
(-27.7% qoq); and 2) Marketing expenses (-37.5% qoq). Var to Cons (%) (17.9) (17.4) (7.9)

♦ Teleconference highlights. TM’s UniFi packages have so far registered a PE Band Chart

take-up of 2,367 customers and management is positive that the take-up

PER = 20x
would increase substantially in the remaining months of FY10, as it is on PER = 15x
PER = 10x
track to extend HSBB services from 4 areas currently to 22 areas in Jul 10
and 48 areas by end-10. As for capex, management guided that both BAU
and HSBB capex will accelerate in the remaining quarters of FY10 but the
earlier capex guidance of RM3.4bn in FY10 remains unchanged.

♦ Risks. The risks include: 1) further fixed-to-mobile substitution leading to

declining revenues; 2) low return from the HSBB project; and 3) weaker- Relative Performance To FBM KLCI
than-expected cash flows, which could adversely affect dividend payments.

♦ Forecasts. We have trimmed our FY10-12 net profit forecasts by 4.9-

FBM KLCI
7.8%, largely to reflect an upward revision in our effective tax rate
assumptions to 28-30% (from 26%). TM

♦ Investment case. We have retained our fair value of RM3.55, which is

based on a required net yield assumption of 5.5% on the minimum
RM700m dividends. Maintain Market Perform.

Chye Wen Fei

(603) 9280 2172
Please read important disclosures at the end of this report. chye.wen.fei@rhb.com.my

David Chong, CFA

(603) 9280 2186
david.chong@rhb.com.my

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 31 May 2010

1QFY12/10 Results Review

♦ 1Q10 missed expectations. 1Q10’s core net profit of RM92.7m (-53.6% yoy; -5.0% qoq) came in below
expectations, accounting for only 19.3% of our and 16% of consensus full-year estimates respectively. The key
variances were: 1) lower-than-expected other operating income; and 2) Higher-than-expected effective tax rate
(ex-EI) of 32.3% vs. our full-year assumption of 26%. However, 1Q10 revenue was in line with our estimate

♦ 1Q10 revenue declined by 6.5% qoq to RM2,124.9m and this was mainly due to lower voice revenue (-1.7%
qoq), data and leased revenue (-6.8% qoq, led by the global division) and other revenue (-25.6% led by the retail
division), which more than offset the higher internet revenue (+5.2%, in line with the higher net adds of 54k in
1Q10). Its EBITDA declined by a slower pace of 5.6% qoq, as EBITDA margin increased by 0.7%-pt qoq to 33.2%
mainly due to lower: 1) Supply and material costs (-27.7% qoq); and 2) Marketing expenses (-37.5% qoq).
Fixed–line customers declined by 0.1% qoq (residential: -0.1% qoq; business: -0.1% qoq) and blended ARPU
declined by 1.2% (residential: +5.3% qoq to RM20; business: -4.5% qoq to RM64). Management attributed both to
intense competition from the mobile players. On a positive note, broadband net adds stood at 54k. this was the
highest that TM has registered since 3Q08 due to its attractive bundled packages.

Briefing highlights

♦ UniFi. Since its official launch on 24 Mar 10, TM’s UniFi packages have registered a take-up of 2,367 customers,
which is in line with management’s expectations. Management is positive that the take-up will increase substantially
in the coming months due to: 1) expansion of service from 4 areas currently (namely, Bangsar, TTDI, Subang Jaya
and Shah Alam) to 22 areas in Jul 10 and 48 areas by end-10; 2) 7k names on the waiting list; and 3) expansion in
the number of installation teams. Management targets to raise the number of installations/day from 50-60 to 90-
100 in two weeks’ time, 400-450 by 2H. In our forecasts, we assumed: 1) TM will achieve its year-end premises
passed targets; 2) UniFi take-up rate of 20% by end-FY10, rising to 30% by end-FY12; 3) 75% of UniFi net adds
would be switches from Streamyx; and 4) UniFi ARPU of RM150 for FY10, falling to RM135 for FY12.

♦ Cash pile rises further, but no commitment on capital management yet. TM’s cash pile balance as at 31 Mar
10 rose further to RM3.9bn from RM3.5bn as at end-FY09, while gross debt/EBITDA stood at 2.3x as at 31 Mar 10,
which is within the management’s comfort zone of 2-2.5x. Management did not provide any firm commitment to
pay shareholders in excess of its minimum dividend policy but more clarity should be forthcoming in 2H10 after a
decision is made on the US$250m debt due end-2010 (i.e. refinance or repay).

♦ Capex. TM incurred total capex of RM276m in 1Q10, comprising business as usual (BAU) capex of RM124m and
HSBB capex (gross) of RM152m. We note that BAU capex spending has improved both in absolute terms (1Q09:
RM218m) and as a % of revenue (1Q10: 5.8% vs. 1Q09: 10.3%) due to better optimisation of its existing
infrastructure. Management guided that both BAU and HSBB capex will likely accelerate in the remaining quarters
of FY10 but kept its FY10 capex guidance of not more than RM1.4bn for BAU and HSBB capex (gross) of RM2bn
unchanged.

Risks

♦ Risks to our view. The risks include: 1) further fixed-to-mobile substitution leading to declining revenues; 2) low
return from the HSBB project; and 3) weaker-than-expected earnings/cash flows, which could adversely affect
dividend payments.

Forecasts

♦ Forecasts. We have trimmed our FY10-12 net profit forecasts by 4.9-7.8%, largely to reflect an upward revision in
our effective tax rate assumptions.

Valuations And Recommendation

♦ Investment case. We have retained our fair value of RM3.55, which is based on a required net yield assumption of
5.5% on the minimum RM700m dividends. Maintain Market Perform.

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 31 May 2010

Table 2 : Earnings review

QoQ YoY
FYE Dec (RMm) 1Q09 4Q09 1Q10 (%) (%) Comments
2,105.4 2,272.6 2,124.9 (6.5) 0.9
Revenue 1Q10 declined qoq on weaker voice revenue (-1.7% qoq) and data &
leased revenue (-6.8%), partly mitigated by stronger internet
revenue (+5.2% qoq).

814.5 731.7 715.3 (2.2) (12.2)

EBITDA
(519.7) (494.9) (456.8) (7.7) (12.1)
Dep/Amor

EBIT 294.8 236.8 258.5 9.2 (12.3)

Net int exp (30.2) (56.5) (72.3) 28.0 >100
Total borrowings stood at RM6.5m as at 31 Mar 10 (vs. RM6.7bn in
4Q09 and RM7.2bn in 1Q09). Higher net interest expense yoy mainly
due to absence of interest income from Axiata.
Assoc 0.5 0.0 (0.2) nm >100
Exceptionals (173.8) 73.3 166.6 >100 >100
See Table 4.

91.3 253.6 352.6 39.0 >100

Pre-tax profit
(55.1) (75.3) (101.7) 35.1 84.6
Tax
(8.5) (8.1) (8.0) (1.2) (5.9)
Minority interest
27.7 170.2 242.9 42.7 >100
Net profit Please refer to Table 4 for significant lumpy and one-off items
affecting PAT.
199.9 97.6 92.7 (5.0) (53.6)
Core net profit

Margins (%)
EBITDA 38.7 32.2 33.7
EBIT 14.0 10.4 12.2
Pretax 4.3 11.2 16.6
ETR 60.4 29.7 28.8
Net profit 1.3 7.5 11.4
Core PAT 9.5 4.3 4.4
Source: Company, RHBRI

Table 3 : Operating statistics

QoQ YoY
FYE Dec 1Q09 4Q09 1Q10 (%) (%) Comments
Fixed line customers (m)
1.51 1.55 1.55 (0.1) 3.1
Business Management attributed the qoq drop to intense competition
from mobile players.
2.78 2.77 2.76 (0.1) (0.8)
Residential As above.

Fixed Line ARPU (RM)

74 67 64 (4.5) (13.5)
Business
21 19 20 5.3 (4.8)
Residential

Broadband customers and ARPU

1.33 1.43 1.49 3.8 11.4
Streamyx customers (m) Net adds increased qoq on attractive bundle packages.
87 86 86 0.0 (1.1)
ARPU (RM)
Source: Company, RHBRI

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 31 May 2010

Table 4 : Significant Lumpy And/Or One-Off Items Affecting PAT (net of tax)

FYE Dec (RMm) 1Q09 4Q09 1Q10 Comments

- - -
Bad debts/revenue
adjustment for VOIP debtors
(4.5) 9.9 (11.7)
ESOS
6.2 19.7 (4.7)
Diminution in value of
investment
(175.5) 47.3 166.6
Forex gains/(loss) Unrealised forex gain/(loss) on US$ denominated bonds.
0.0 (3.6) 0.0
Gain on disposal of assets
(net assets written off)
0.0 13.7 0.0
Finance costs FY09 mainly relates to Section 110 refund on RM denominated debt
from Government.
1.6 (14.4) 0.0
Taxation
(172.2) 72.6 150.2
Total

Source: Company

Table 5 : Earnings Forecasts Table 6 : Forecast Assumptions

FYE Dec (RMm) FY09a FY10F FY11F FY12F FYE Dec FY10F FY11F FY12F

Turnover 8,608.0 8,811.7 9,132.2 9,402.7 Voice rev gwth (%) (4.9) (5.0) (3.3)
Turnover growth (%) -0.8 2.4 3.6 3.0 Data rev gwth. (%) 16.1 13.2 10.8
Broadband subs gwth (%) 15.0 10.0 5.0
EBITDA 3,010.3 3,038.9 3,171.7 3,329.8 Broadband ARPU (RM) 84.0 82.0 80.0
EBITDA margin (%) 35.0 34.5 34.7 35.4
Capex (net of subsidy) (RMm) 2,300 1,800 2,100
Dep. & amort. (2,038.3) (2,082.3) (2,155.4) (2,198.3)

EBIT 972.0 956.6 1,016.4 1,131.5

EBIT margin (%) 11.3 10.9 11.1 12.0
Net interest expense (216.7) (289.0) (304.0) (307.0)
Associates 0.6 0.0 0.0 0.0
Exceptionals 165.7 0.0 0.0 0.0
Pretax Profit 921.6 667.6 712.4 824.5
Tax (248.3) (200.3) (206.6) (230.9)
Minorities (30.3) (25.7) (27.8) (32.7)
Net Profit 643.0 441.6 478.0 561.0
Core Net Profit 468.5 441.6 478.0 561.0
Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank
(previously known as RHB Sakura Merchant Bankers). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions and
information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be contrary to
opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be construed as an
offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any manner whatsoever
and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons may from time to time
have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of
persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy
will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts any liability for
any loss or damage arising out of the use of all or any part of this report.

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investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB Group
may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity securities or loans
of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other
services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based upon
various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

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 31 May 2010

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher
risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended securities,
subject to the duties of confidentiality, will be made available upon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the
actions of third parties in this respect.

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