KUALA LUMPUR: CIMB Equities Research has upgraded Telekom Malaysia from Reduce to Hold with an unchanged discounted cashflow based target price of RM6.30.
It said on Wednesday after the substantial share price decline over the past three months, it believesTM’s valuation has now fairly priced in the risk of earnings dilution from Packet One (P1).
“TM trades at FY16 EV/OpFCF (enterprise value/operating free cashflow) of 12.8 times, which is a 19% discount to its Malaysian telco peers.
“TM’s FY15F-17F dividend yields of 3.7%-3.8% are also now more in line with its Malaysian telco peers. For Asean telcos, our top picks are Indosat, XL and AIS,” it said.
To recap, CIMB Research said TM’s share price has fallen by 14.7% since hitting its peak in May. Incomparison, over the same three month period, the KLCI is down a lesser 13.6%.
“We believe that TM’s underperformance can be attributed mainly to investors’ concerns over P1’s negative earnings impact after the release of TM’s 1Q15 results at end-May. Due to the weakness in the RM vs. US$, foreign investors have also pared down their stakes in TM, with foreign shareholding dropping to15.1% at end-July from 16.7% at end-2014,” it said.
On TM’s financial performance, it said 2Q15 core net profit rebounded 28.2% on-quarter (+2.6% on-yer) due to higher revenue and lower opex. 1H15 came in at 41% of its FY15 forecast (consensus: 42%) and was line, as the research house expects a stronger 2H.
During a conference call, TM said that the physical rollout of P1’s LTE network is already underway, starting with its existing 2,000 sites, and will target areas where P1 can get contiguous coverage.
P1 is also in discussion with all mobile operators and is confident of signing a domestic roaming agreement for both voice and data. Management maintained its guidance for an LTE product launch from P1 by year-end.
“HSBB2 and SUBB negotiations have been finalised and TM expects to sign the contract with the government within the next 1-2 months. HSBB2 will expand the fibre network coverage into state capitals, which are areas with relatively high income and pent-up demand for fibre broadband services,” the research house said.
CIMB Research said TM’s unhedged foreign currency debt is only US$200mil or 12% of its total debt. It has no intentions to hedge this given the relatively small exposure and repayment due only in 2025.
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