KUALA LUMPUR (Aug 29): Despite the telco giant's assurance of having the confidence to deliver a better set of financial results in the current financial year, Telekom Malaysia Bhd's (TM) share price took a dive this morning, falling as much as 9.6%.
Selling has persisted since the opening bell although TM announced a 12% growth in net profit to RM114.18 million for the second quarter ended June 30, 2019 (2QFY19) on the back of a 6% increase in quarterly revenue to RM2.77 billion.
At least two equity research teams, namely CGS-CIMB Research and HSBC, have downgraded the stock to sell. However, both have raised their target price on the telco in view of the latest set of quarter results.
Analysts, in general, are concerned that it would be challenging for TM to sustain its revenue growth, in addition to the competitive operating landscape that will eat into its profitability and dividend payment. Furthermore, they foresee increase in capital expenditure and the recent share price rally seems to have already factored the earnings growth.
"We raise TM's DCF-based target price by 9% to RM3.70 (WACC: 7.5%) after rolling forward the base year and our earnings revision, but downgrade from hold to reduce due to the recent share price rally.
"A key de-rating catalyst is weaker 2H19F earnings. Key upside risks: sooner-than-expected rationalisation of webe losses and award of government grants for network rollout," said CGS-CIMB Research, which raised its target price to RM3.70 from RM3.40.
HSBC downgraded the telco to a "reduce" recommendation from hold, with a lower target price of RM3.60, from RM2.90 previously, according to Bloomberg. In the past two years and seven months, HSBC had placed a hold call on TM twice and reduce call once.
At the lunch break, the telco stock regained some lost ground to settle at RM3.74, down 34 sen or 8.3% with 16.62 million shares changing hands. The counter is the eighth most traded stock on Bursa Malaysia in the morning trading session. TM's share price hit a low of RM3.65 — the lowest level since mid-June — this morning.
According to Bloomberg, TM has 26 analysts covering it. Three of them have buy calls, 13 have hold calls and 10 have sell calls, with a 12-month consensus target price of RM3.98.
MIDF Research highlighted in a note this morning that TM's cost rationalisation programme has resulted in an improvement in the group's profit margin and profitability, but there are concerns over TM's ability to grow its revenue.
"However, we remain concerned over the group's ability to grow its revenue, especially its unifi business, which is the group's main revenue contributor.
"Note that the broadband average revenue per user (ARPU) and the customer base continues to dwindle in view of the competitive market landscape," said MIDF Research.
It noted that despite expectations of higher earnings growth, TM shareholders can only receive up to 60% of the telco's profit after tax and minority interest (PATAMI), which is based on the group's revised dividend policy.
This combined with capital expenditure requirements resulted in MIDF Research viewing TM's dividend yield to be less than 4%.
MIDF Research has maintained its neutral call on the counter, with an unchanged target price of RM3.54.
Meanwhile, Affin Hwang Capital said it was maintaining its hold call and target price of RM4.15 on TM, as well as its earnings forecasts.
"At 16 times 2020 earnings (2020E) price-earnings ratio (PER), TM is currently trading at -1 standard deviation (SD) from its seven-year average, and looks fair, considering its weak revenue outlook, rising competition in the fixed broadband market and TM's ongoing expansion into the highly competitive cellular space," Affin Hwang Capital said.
AmInvestment Bank Research said it was maintaining its hold call on TM with an unchanged fair value of RM4.25 a share.
Given TM's role as the national broadband provider, the group will likely have to bear half of the costs associated with the National Fiberisation and Connectivity Plan (NCFP), which translates into RM2.2 billion over the next five years, said AmInvestment Bank Research.
"Besides TM's own capex requirements, the NFCP rollout alone translates to 19% of the forecasted financial year ending Dec 31, 2020 (FY20F) revenue — already above management's FY19F capex target of 18% and 8% in 1HFY19. Additionally, the thrust of the NFCP towards connecting the rural population could mean that revenue accretion from these investments will be minimal," said AmInvestment Bank Research.
Against a backdrop of rising capex needs and tepid revenue growth trajectory, TM currently traded a fair FY20F enterprise value to earnings before interest, tax, depreciation and amortisation (EV/EBITDA) of five times, with a dividend yield of 3%.
For the second quarter ended June 30, 2019 (2QFY19), TM's net profit rose 12% y-o-y to RM114.18 million from RM101.93 million, translating into higher earnings per share of 3.04 sen, from 2.71 sen a year prior.
Quarterly revenue declined 6% y-o-y to RM2.77 billion from RM2.94 billion on the back of a decline in voice, Internet and multimedia services, other telecommunication related as well as non-telecommunication related services.
For 1HFY19, net profit expanded 63% to RM422.46 million, from RM259.09 million in the corresponding period last year, despite revenue declining 4% to RM5.55 billion from RM5.78 billion last year.