Telekom Malaysia Bhd (TM) needs to optimise its balance sheet to avoid long-term return-on-equity (ROE) drag, according to CGS-CIMB.
In its Company Note today (Feb 19), the research house said without optimising its balance sheet, TM’s net debt to earnings before interest, taxes, depreciation, and amortization (Ebitda) could fall to 0.4 times by the financial year ending Dec 31, 2025FY25F and 0.2 times by FY26F unless excess cash is returned to shareholders.
“While elevated margins from reduced tax rates will lift ROEs in FY23F and FY24F, the falling financial leverage will become a drag on ROEs longer term, unless this cash buildup is addressed.
“We estimate that this translates to the need to return an additional RM0.68 per share in excess cash to shareholders through 2024F just to maintain TM’s already low net debt to Ebitda multiple of 0.9 times, as at end of September.
“This compares to pure play Malaysian mobile operators CelcomDigi Bhd and Maxis Bhd at 2 times and 2.3 times, respectively, as at end-September 2023,” it noted.
CGS-CIMB said even if FY24F tax rates were to normalise to 23% compared to its current 1% estimate, it think TM would need to return RM0.56 per share to maintain an FY24 net debt to Ebitda ratio of 0.9 times.
“Our capex assumptions for FY23 to FY26F of 18 to 19% of sales are within management’s 18% to 20% guidance for FY23F, but above the 16 to 18% base for a long-term range, without special projects.”
It said TM articulated this at the CGS-CIMB Malaysia Corporate Day in Jan 24 – further suggesting room for either higher excess cash returns or a lift in dividend payout ratios.
Ahead of its 4Q23 results to be announced on 23 February 2024, the research house reiterated its ADD rating on TM with an unchanged target price (TP) of RM7.30, based on 5.6 times FY25F enterprise value to earnings before interest, taxes, depreciation and amortization (EV/Ebitda).
“At 13.8 times FY24F P/E, TM’s valuations are undemanding compared to Malaysian mobile pure plays and regional peers. FY23 to FY26F dividend yields of more than 4.5% before special cash returns are also attractive compared to regional and domestic peers, in our view,” it added.
CGS-CIMB said it see continued earnings delivery, coupled with potentially higher dividends, providing the key re-rating catalysts for the stock over the next 12 months.
“Key downside risks, in our view, would be increased regulatory intervention by the government in its social objectives such as higher discounts, and TM taking a leading role in a 5G wireless network.”
