This article first appeared in The Edge Financial Daily on March 20, 2019
Telekom Malaysia Bhd
(March 19, RM3.18)
Upgrade to market perform with a higher target price of RM3.10: Telekom Malaysia Bhd (TM) has revealed its intention to sell more buildings and land bank to unlock the value of its assets following a tender bid called for its two buildings (Annexe 1 and Annexe 2) recently, according to the local media. The intention to rationalise its non-core property assets came as no surprise to us given TM is consistently aiming to create long-term value for its shareholders via strengthening the balance sheet and focus the company’s portfolio on its core business that drives growth.
TM has published a tender notice recently for the 20-storey TM Annexe 1 and the 33-storey Annexe 2, which are located next to Menara TM, and plans to close the submission on March 29. The two leasehold office towers have a combined gross floor area of 679,015 sq ft with a net lettable area of 468,772 sq ft. It has lately been reported that the reserve price range is between RM273 million and RM312 million, implying RM755-RM1,027 per sq ft, similar to the surrounding price offered based on our observation. While the net book value (NBV) of the said buildings is unknown for now, we understand that all its buildings and land as per its 2017 annual report were estimated to be RM3 billion, of which 30% (or RM877 million) was derived from value of land and 55% (or RM1.17 billion) from its buildings located in Kuala Lumpur.
The disposal of two office blocks is expected to generate extra cash to TM, which could be utilised for capital expenditure or lowering debts. For illustration purposes, assuming the two office blocks are disposed of at their reserve price (RM585 million), coupled with half of its land unloaded at 20% higher than its 2017 NBV, TM’s balance sheet could potentially be strengthened by an additional RM1.1 billion in cash. Should all of the proceeds be utilised for lowering debts, financial year 2019 (FY19) gross debt/earnings before interest, taxes, depreciation and amortisation ratio could be reduced to 2.2 times (compared with 2.5 times initially) with gearing of 0.6 times (compared with 0.8 times). However, we downplay the prospect of special dividend (arising from the proposed disposals) given the group is aiming to strengthen its cash position amid rising cost pressure and competition.
While we make no changes to our FY19-FY20 estimated earnings for now, pending the outcome of the tender process, we believe TM is on the right track to enhance operational efficiency and strengthen its balance sheet via active asset management. — Kenanga Research, March 19