Telekom Malaysia (TM) is planning to adopt a more active asset management stance to strengthen its balance sheet. We are POSITIVE as it could address the current low yield of its non-core properties. All in, we maintain FY19-20E earnings but raised the stock to MARKET PERFORM with higher DCF-derived target price of RM3.10 in view of better cash management ahead.

Unlock non-core properties values. TM has revealed its intentions to sell more buildings and landbanks to unlock the value of its assets following a tender bid being called for its two buildings (Annexe 1 and Annexe 2) recently, according to the local media. The intention to rationalize its non-core property assets came as no surprise to us given TM is consistently aiming to create long-term value to its shareholders via strengthening the balance sheet and focus the company’s portfolio on its core business that drives growth.

Call for tender. TM has published a tender notice recently for 20- storey TM Annexe 1 and 33-storey Annex 2, which are located next to Menara TM, and planned to close the submission on March 29. The two leasehold office towers have a combined gross floor area of 679,015 sq.ft. with a net lettable area of 468,772 sq. ft. Press has lately reported that the reserve price range is said to be between RM273m and RM312m, implying RM755-1,027psf, similar to the surrounding price offered based on our observation. While the NBV of the said buildings is unknown for now, we understand that all its buildings and lands as per its 2017 annual report are estimated at RM3.0b, of which 30% (or RM877m) is derived from value of lands and 55% (or RM1.17b) to its buildings located in Kuala Lumpur (Figure 1 & 2).

To address low land and buildings’ yields. The yields of the group’s land and buildings are clearly pedestrian, based on its FY17 annual report where the OPEX related to the land and buildings stood at c.RM341m vs. rental income of merely RM46m. The disappointing yield has prompted the group to find ways to enhance its properties value, which include asset's optimisation and/or disposal.

Expecting better cash management ahead. The disposals of two office blocks are expected to generate extra cash to TM, which could be utilized for capex or lowering debts. For illustration purpose, assuming the two office blocks are disposed at its reserve price (i.e. RM585m), coupled with half of its lands unloaded at 20% higher than its 2017 NBV, TM’s balance sheet could potentially strengthen by an additional RM1.1b cash. Should all of the proceeds are utilised for lowering debts, FY19 Gross Debt/EBITDA ratio could be reduced to 2.2x (vs. 2.5x initially) with gearing of 0.6x (vs. 0.8x). However, we downplay the prospect of special dividend (arise from the proposed disposals) given the group is aiming to strengthen its cash position amid rising cost pressure and competition.

Maintained FY19-20E earnings forecasts. While we made no changes to our FY19-20E earnings for now, pending the outcome of the tender process, we believe TM is on the right track to enhance operational efficiency and strengthen its balance sheet via active asset management.

Upgrade to MARKET PERFORM rating with higher DCF-driven TP of RM3.10 (vs. RM2.50 previously) post lowering our WACC assumptions by 1% to 8.6% in view of the better cash management ahead.

Downside risks to our call include: (i) unfavourable change in regulation, (ii) stiffer fixed broadband competition, and (iii) higher-than- expected OPEX. On the flip side, upside risks to our call include: (i) favourable regulation framework, and (ii) stronger-than-expected top-line and margin growth.

Source: Kenanga Research - 19 Mar 2019