Telekom Malaysia
Buy (unchanged) Share price: RM3.55
Target price: RM3.86 (unchanged)
Khair Mirza khair.mirza@maybank-ib.com (603) 2297 8678
Under-estimated and misunderstood
Another under-appreciated facet of Telekom Malaysia is its over RM1.1b worth of shares in Axiata Group and Measat Global that can be realised over the next 6-12 months. Maintain our Buy call and RM3.86 DDM-based TP which leaves room for further upgrades if it surprises the market on its HSBB execution in 2011-12.
Look past 2Q’s net profit. TM reports its 2Q results today, where we expect Streamyx (ADSL) subscriber additions to exceed 1Q’s record 52,000. Nonetheless, with 2010 being TM’s peak year of capex for the HSBB roll-out, we also expect it to be the peak year for associated operating expenses in relation to HSBB roll-out activities. For instance, TM could have over 6,500 Unifi (fibre) subscribers at end-July (1Q: 2,000 subs) for which the cost of end-user equipment will be expensed but for which revenue will only begin to be recognised in 3Q.
Non-core assets ready to be monetised. As part of its demerger with Axiata, an ESOS program put nearly 200m Axiata shares into TM’s coffers. Option holders only profit from the difference between the market price and the exercise price of these options, which is between RM4.70-4.80/shr. At yesterday’s price, this stake is worth RM870m. Add the RM252m in proceeds that TM will receive from Measat’s privatisation and TM could be sitting on over RM1.1b in cash.
Clearly misunderstood. We think that this will once and for all clear any doubts about the sustainability of TM’s dividend guarantee of a minimum RM700m annual pay-out in 2010-11 before the earnings accretive impact of HSBB begins to kick in.
Buy this under-estimated gem. Our RM3.86 DDM-derived TP assumes only the minimum net dividend of RM700m p.a. The RM1.1b (or 31.7sen/shr) in cash and near cash that TM could dividend out over 2010-11 would add another 8.2% to our TP, to a blue-sky scenario RM4.18. We may review our TP after its results release tomorrow after gauging the details of its progress on the roll-out of the HSBB network.
