PETALING JAYA: Telekom Malaysia Bhd ’s (TM) net debt to earnings before interest, tax, depreciation and amortisation (Ebitda) may fall to 0.4 times for the financial year 2025 (FY25) and 0.2 times by FY26 unless excess cash is returned to shareholders, says CGS-CIMB Research.
“While elevated margins from reduced tax rates will lift the return on equity (ROE) in FY23 and FY24, the falling financial leverage will become a drag on ROE in the longer term, unless this cash buildup is addressed.
“We estimate that this translates to the need to return an additional RM0.68 per share in excess cash to shareholders through 2024 just to maintain TM’s already low net debt to Ebitda multiple of 0.9 times (as of end-September 2023).
“This compares to pure-play Malaysian mobile operators CelcomDigi Bhd and Maxis Bhd at two times and 2.3 times, respectively, as of end-September 2023.
“Even if FY24 tax rates were to normalise to 23%, versus our current 1% estimate, we think TM would need to return RM0.56 per share to maintain an FY24 forecast net debt to Ebitda ratio of 0.9 times,” CGS-CIMB Research added.
The research firm said its capital expenditure (capex) assumptions for FY23-FY26 estimate of 18%-19% of sales are within management’s 18%-20% guidance for FY23, but above the 16%-18% base (without special projects) long-term range which TM articulated recently.
This suggests room for either higher excess cash returns or a rise in dividend payout ratios, it noted.
The research house reiterated its “add” call on TM with an unchanged price target of RM7.30, adding that it sees continued earnings delivery, coupled with potentially higher dividends, providing key re-rating catalysts for the stock over the next 12 months.
Key downside risks would be increased regulatory intervention by the government for social objectives, such as higher discounts, and TM taking a leading role in a 5G wireless network, it said.
In the third quarter ended Sept 30, 2023, TM’s profit after tax and non-controlling interest experienced a surge of 102.9% from RM265.2mil to RM538.2mil, against a revenue of RM3.08bil, primarily attributed to a lower tax impact and reduced net finance costs.
In the first nine months of 2023, TM posted net profit of RM1.4bil, up 46.2% from RM983.1mil from the similar period in 2022, while revenue was flat at RM9.13bil from RM9.14bil.