TM ready for a re-rating?

Dominant player: TM headquarters in Kuala Lumpur. TM has for a long time relied on its dominant position to thrive in the market place when the entire dynamics of the game is fast changing. — Bernama

A WHOLE gamut of things – ranging from abrupt leadership changes twice in six months to other operational issues – have affected Telekom Malaysia Bhd (TM) for its share price to fall to a low of RM2.15 last month. Although there have been signs of some stability returning to its share price in recent days, the question is whether the pick-up would be sustainable.

As TM appointed Imri Mokhtar as its acting CEO effective Nov 16 following the departure of Datuk Bazlan Osman, the buzz around town is that two other candidates are being considered for the group CEO post. The names of Rossana Rashidi and Nasution Mohamed, both formerly of Maxis Bhd, have been bandied about but could not be verified, although Imri is also a potential candidate.

“Leadership stability is vital at this point. Investors need to know who will lead the organisation in these challenging times, more so with TM expected to be excluded from the FBM KLCI component stock grouping since it has experienced a huge drop in market capitalisation,” says an industry executive.

Apart from that, some lobbyists are busy pushing for the convergence agenda at TM. Others also want the government to consider a mandatory standard access pricing (MSAP) for the mobile sector and do away with the commercial agreements, as in the case of the wholesale fibre access, to give companies like TM a fair play in the mobile sector.

TM’s share price closed unchanged at RM2.33 yesterday, down two sen, with its market capitalisation at RM8.76bil. Year-to-date, the share price has fallen 62%.

That aside, TM has for a long time relied on its dominant position to thrive in the marketplace when the entire dynamics of the game is fast changing.

“Being TM, it seems the company is not fully prepared for the onslaught of intense competition simply because it is often seen as an extension of a government agency and is protected,” says an industry executive who declined to be named.

He believes TM was somewhat surprised that the MSAP for wholesale fibre access could be implemented so fast when it had been dragging its feet to delay the implementation from late last year.

“It is a known fact that the MSAP was done in consultation with all players and TM knew exactly what the implications were and should have been more prepared for the onslaught. However, the-then leadership was busy doing things for the previous political masters,” he adds.

It is now clear that this government wants wider connectivity and has opened the flood gates for other players to actively wire up Malaysia so that all can have access to the Internet to pave the way for a digitalised Malaysia. Broadband rates are below RM100 for 100Mbps per month now, something impossible just six months ago.

Experts are of the view that whoever becomes the full-time CEO of TM has to be aggressive in pushing for higher productivity within the organisation and cut the layers of hierarchy for better effectiveness.

“These are challenging times and it can only get worse. TM needs to be more aggressive in its push to grow its business, looking at new ways of doing things, optimising its assets and maximising its resources, improving the quality of its services and taking care of its loyal customers,” says an industry source.

TM released its third-quarter results ended Sept 30, 2018 this week with a net loss of RM175.6mil. This is the first net loss in a decade because TM decided to make a one-off massive RM995mil impairment charge on its network assets.

This impairment was for fixed and wireless legacy network assets and was “cushioned by a RM312mil gain from the unwinding of a discount on a put option for Webe.” The nearly RM1bil impairment will reduce future depreciation charges.

Public Investment says that given the decline in future earnings, TM’s capex is likely to be reduced and this should lead to lower depreciation charges in the future.

A closer look at the results shows that operationally, the telco did better with core net profit, or normalised profit after tax and minority interest (Patami) excluding non-operational items at RM266.4mil, which is 31% higher year-on-year (y-o-y) and 71% quarter-on-quarter (q-o-q).

This was led by lower-than-expected operating expenditure and taxes, although revenue growth was a marginal 2% y-o-y. This brings the nine-month core net profit to RM528mil.

The broadband customer base fell 2.7% y-o-y to 2.228 million customers, while unifi average revenue per user (Arpu) was lower at RM193 per month from RM199 per month in the third quarter.

Looking ahead, analysts believe TM will face tough times more so with the MSAP pricing factored in to its fourth-quarter earnings.

Based on that, most research houses are revising their full-year earnings targets.

Public Investment has raised its forecast financial year 2018 (FY18)-FY20 core earnings by 6%-10% after factoring in higher Arpu for unifi and higher data revenue.

Kenanga Research says it has trimmed its core earnings for FY19 by 12% after factoring in lower unifi/pre-unifi Arpu (to RM174/RM79 compared with RM180/RM86 previously) as a result of higher propensity of subs down-trading, lower broadband subscribers, and steeper competition.

Despite all that, at current levels of its stock price, some feel it is time “to nibble” on the stock even though the full impact of the wholesale access pricing structure has yet to be factored in. The impact will be reflected in its fourth-quarter earnings, expected to be released in February next year.

Public Investment has upgraded the stock to a “trading buy”, with a 12-month target price of RM3.60 a share, while Affin Hwang Capital has upgraded TM from a “sell” to a “hold”, with a target price of RM2.30 a share.

“While TM’s operating outlook remains challenging – rising competition, lower package prices – we think the negatives have largely been priced in. The upside risks are robust broadband Arpus, strong subscriber growth and material decline in operating costs, while the downside risks are a sharp decline in broadband Arpus and weak subscriber growth,” says Affin Hwang.

Bloomberg’s 12-month consensus target price for the stock is RM2.74 a share. Of the 28 brokerages tracking the stock, according to Bloomberg consensus, four have a “buy” call, 15 “hold” and nine “sell”.

“TM could be excluded as a component stock of the FBM KLCI in the upcoming review. All said, we believe its share price has priced in all the negative news. The potential re-rating catalyst includes TM continuing its cost-cutting efforts that could lead to greater margin improvements,” says Public Investment.

CGSCIMB says the “share price is down 61% (RM2.32 a share) in 12 months. We believe TM’s share price is now near the bottom. Key upside/downside risks include unifi mobile turning profitable sooner than expected and keener broadband price competition”.

TM’s cashflow is still strong and it has over RM2bil cash in its coffers. Yet, the company has decided to revise its dividend policy to 40% to 60% of Patami from the higher RM700mil or 90% of dividend payout ratio previously, much to the chagrin of some investors. TM has yet to declare any dividends for the nine-month period of FY18.

MIDF Research says it is revising downwards the FY18 and FY19 dividend estimates to 4.3 sen and 8.2 sen, respectively.

“Subsequent to the revision in dividend policy, we are reducing our target price to RM1.89 (previously RM3.02 a share). This is based on the dividend discount model valuation methodology,” the research house says.

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