This article first appeared in The Edge Financial Daily on June 17, 2019
KUALA LUMPUR: After being bashed down by regulatory and competitive pressures, Telekom Malaysia Bhd’s (TM) shares have staged a strong comeback after the group posted better-than-expected results for the first quarter ended March 31, 2019 (1QFY19).
The share price has rallied 39.7% since the 1QFY19 results announcement, from RM2.72 on May 29 to RM3.80 last Friday. Consequently, the telecommunications company giant’s market capitalisation has ballooned to RM14.28 billion, surpassing that of the three lowest FBM KLCI constituents, namely Malaysia Airports Holdings Bhd, AMMB Holdings Bhd, and Top Glove Corp Bhd.
Earlier this month, FTSE Russell and Bursa Malaysia Bhd announced that there will be no changes to the constituents of the KLCI following the semi-annual review of the FBM Index Series.
TM, which was removed as a constituent of the benchmark index together with KLCCP Stapled Group in the December 2018 review, is now in the reserve list along with Westports Holdings Bhd, Fraser & Neave Holdings Bhd, YTL Corp Bhd and QL Resources Bhd.
With the current rally, some investors think TM may return to the ranks of the KLCI. The more pertinent question is whether there is more upside ahead for the counter.
According to Bloomberg, of the analysts who track the telco, 14 of them have a “buy” calls, 11 “hold”, and three “sell”, with the target prices ranging from RM2.40 to RM5.
TM’s improved financial performance in 1QFY19 coincided with the group’s adoption of the Malaysia Financial Reporting Standard 16 (MFRS 16). This change of accounting treatment has helped the group recognised RM23.9 million more profit after tax and minority interest (Patmi) for the quarter.
TM’s presentation slides to analysts disclosed that 1QFY19 Patmi post-MFRS 16 was RM308.3 million, or 8.4% higher than the RM284.4 million Patmi under pre-MFRS 16’s accounting treatment.
While analysts concur that there is a positive effect from MFRS 16, they opined that the major driver of the improved financial performance in the quarter was still the group’s rationalisation effort.
In a note to investors on May 31, AllianceDBS Research analyst Toh Woo Kim observed that the positive impact from MFRS 16 was minor after netting off the increase in depreciation and amortisation, and finance cost, which also faced changes due to the shift in accounting treatment.
“The implementation of the MFRS 16 leases led to higher earnings before interest, taxes, depreciation and amortisation (RM97 million) as rental cost for network sites was reclassified as finance lease. Net positive impact on Patmi was RM24 million, after netting off the increase in D&A (depreciation and amortisation) (RM39 million) and finance cost (RM26 million), among others,” he said. Toh upgraded TM to a “buy” call with a higher target price of RM4.30.
TM’s 1QFY19 net profit jumped 96% to RM308.28 million, from RM157.16 million a year ago, despite revenue falling 2.4% to RM2.78 billion from RM2.85 billion.
When contacted, a local bank-backed analyst told The Edge Financial Daily that he agreed with Toh, and expects that with an improved earnings before interest and tax (Ebit) margin, TM could see about 50% growth in earnings for FY19.
“Assume it can maintain about 18% Ebit margin like it did in 1QFY19, in the past its Ebit margin was around 8% to 12%, so if you take 12%, it would be around 50%. So we think the recent share price rally is justifiable, plus TM was badly bashed down last year,” added the analyst, who asked not to be named.
TM’s presentation slides to analyst also disclosed that total cost fell by 14.3% or RM384 million to RM2.3 billion in 1QFY19, from RM2.68 billion in 1QFY18.
Affin Hwang Investment Bank Bhd analyst Isaac Chow, in his research note dated May 31, said TM’s management has delivered cost improvements across all major cost items in 1QFY19, including dealer commission, staff benefits, cable charges and customer equipment, rental of network sites and advertising and promotional spend. Chow also upgraded TM to a “buy” call, with a higher target price of RM4.15.
Given the big jump in share price, it is anyone’s guess whether the rally on TM’s share price would gather steam, sustained profitability in 2QFY19 would certainly help. And that will be the task for its newly appointed managing director and chief executive officer Datuk Noor Kamarul Anuar Nuruddin.