Stock Name: TM
Company Name: TELEKOM MALAYSIA BHD
Research House: ECMLIBRA

Telekom Malaysia Bhd
(Dec 6, RM3.41)
Maintain buy at RM3.44 with a target price of RM3.80: TM announced to Bursa Malaysia that it had completed the book-building exercise for 90 million Axiata Shares on Dec 2. The 90 million shares had been placed to successful third-party institutional investors under private placement at a price of RM4.60 per Axiata share. TM holds a balance of 101.5 million shares after the placement. This has helped TM to raise gross proceeds of RM414 million and book in a gain on disposal of RM210 million.

We think that TM should not face any problems in placing out the remaining 101.5 million shares, given the speed at which the first placement of 90 million shares was taken up, which indicates that there is strong demand for Axiata shares. Our base case scenario assumes that TM will use the RM879.4 million proceeds from the sale of its entire stake in Axiata to repay US$260.3 million (RM817 million) of US dollar-denominated borrowings due to mature this month. This will help TM save on RM65.6 million of interest expenses annually (at 8% interest rate), therefore could revise upwards our FY11 and FY12 net profit by 10.3% and 9.8%, respectively. However, we do not discount the possibility that some or all of the proceeds could be returned to shareholders in the form of special dividends. TM already has an existing dividend policy of returning RM700 million or 90% of its net profit, whichever is higher. Assuming TM pays a special dividend of 25 sen per share, this could bring total dividends for this year to 44.5 sen per share (normal dividend of 19.5 sen + special dividend of 25 sen), which brings total dividend yield to an attractive 12.9%.

We reiterate our 'buy' call on TM with a target price of RM3.80, which is derived using discount dividend model-derived fair value of RM3.54 (LT growth rate: 1.5%, WACC: 7%) plus potential return from 25 sen per share of special dividends, as the sale of Axiata shares is positive regardless whether there are special dividends. Without special dividends, TM's FY11/12 earnings are boosted by 10.3% and 9.8% respectively, resulting from the savings on interest expense after paying back its US$260.3 million borrowings. ' ECM Libra Investment Research, Dec 6


This article appeared in The Edge Financial Daily, December 8, 2010.