We believe one catalyst for Telekom Malaysia’s (TM) shares over the next 12 months will be higher dividends. Already low debt levels (0.9x net debt to EBITDA as at end-Sep 2023) will receive a boost from the very low (CGS est. 1%) tax rates in FY23F and FY24F, further accelerating the decline in net debt to EBITDA levels (FY26F 0.4x), in our estimation. Unless dividend payout is raised, the risk is on longer term ROEs coming under pressure from reduced financial leverage (see Fig 4). Based on our current 55% dividend payout estimate (consistent with FY22), TM’s dividend yield will be 5.0%/5.7% in FY23F/FY24F; every 10% pt increase in payout ratio would raise dividend yields by 1% pt in each FY and add 0.5% pt to FY25F’s ROE. We note that our estimates have already factored in robust capex levels to reflect investments to drive future growth.
We see the announcement of new retail prices for fibre broadband on 4 Oct 2023 as removing the uncertainty around retail broadband pricing, which started after the announcement of lower regulated prices on wholesale broadband under the Mandatory Standards on Access Pricing (MSAP) effective 1 Mar 2023. Management has confirmed at the 3Q23 results call that the lower wholesale rates have been captured in the 9M23 results, suggesting limited adjustments to 4Q23F results. Despite lower prices, we see the impact on broadband ARPU as limited (see Fig 5) as we believe most existing subscribers will maintain their current price points and enjoy higher speeds rather than down trade.
We reiterate our Add call on TM with an increased EV/EBITDA-based (5.6x FY25F) TP of RM7.30 (prev RM6.80 based on 5.7x FY24F) as we roll forward our basis period. At current valuations of 12.4x FY24F P/E and 4.2x EV/EBITDA, TM’s valuations are undemanding vs. both domestic and ASEAN peers (see Fig 9). We see continued earnings delivery coupled with potentially higher dividends providing the key rerating catalysts over the next 12 months. Ideally, in our view, a move to quarterly dividends would be an added catalyst for a step up in valuations, on the basis that more frequent payments have a greater value in the hands of a receiver. 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 rollout.
Source: CGS-CIMB Research - 28 Nov 2023
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