CGS International (CGS) leaves their core profits estimates on Telekom Malaysia (TM) largely unchanged but have removed their tax break assumption for FY24F, following management guidance.
The research house, in its Company Note today (Mar 20), said at 14.2x FY24F core P/E and offering a >4% FY24-26F dividend yields, TM’s valuations are attractive vs. peers, with earnings as the key rerating catalyst.
Catalysts in 2024F
CGS sees continued earnings delivery as the key rerating catalyst for TM’s shares in 2024F. Against this backdrop, their FY24F core net profit estimate of RM1,612m represents a 16.9% yoy growth.
CGS reiterates their Add call on TM with an unchanged target price of RM7.30, post a review of estimates after the 4Q23 results.
The other rerating catalysts, would be: 1) the return of excess capital, and 2) announcements of new projects.
On the former, CGS maintains the view that TM’s balance sheet remains under-geared at 0.75x net debt to EBITDA as at 31 Dec 2023, with a healthy FY24F FCF yield of 7.2% taking this down to 0.55x by end-2024F.
On the latter, potential investments in data centres, given good demand in Malaysia, could excite the market, in CGS’s view.
While TM’s average FY24-26F revenues of RM13bn make it difficult for any single project to be a major rerating catalyst, they could become new longer-term earnings and value generators.
Updating estimates and removing tax benefit
CGS tweaked their FY24F/25F core net profit estimates by 0.3%/0.5% following the 4Q23 results but have reduced their FY24F net profit estimate by 16.7% to remove their assumption of capital allowances keeping TM’s FY24F effective tax rate at 1% resulting in our effective tax rate for FY24F rising to 23% – similar to FY25F’s and FY26F’s.
This change has been driven by management’s guidance during the 4Q23 results call on 23 Feb 2024, CGS said.
Until they have a clearer picture on the utilisation of these capital allowances, CGS believes assuming a 23% tax rate is more prudent.
Undemanding valuations; healthy dividend yields
CGS reiterates their Add call on TM with an unchanged target price of RM7.30 (5.6x FY25F EV/EBITDA). At 14.2x FY24F P/E, TM’s valuations are undemanding vs. Malaysian mobile pure plays and regional peers.
FY24-26F dividend yields of more than 4.5% before special cash returns are also attractive vs. regional and domestic peers
CGS sees continued earnings delivery, coupled with potentially higher dividends, acting as the key rerating 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 (e.g. higher discounts), and TM taking a leading role in a 5G wireless network.
