KUALA LUMPUR (May 21): At least three research houses have downgraded Telekom Malaysia Bhd (TM), advising clients to sell shares in the telecom giant today as its valuation appears even more pricey given the hazy earnings outlook. 

However, one catalyst for TM is its inclusion in the FBM KLCI Component list in the next review. 

Affin Hwang Capital and JF Apex Securities downgraded TM to a “sell” call while Kenanga Research downgraded its call to “market perform” (previously “market outperform”) after the telco announced on Wednesday that its quarterly net profit halved. Meanwhile, MIDF Research maintained its “sell” call on TM. 

TM came under rather heavy selling pressure shortly after the opening bell, slipping to a low of RM4.37. It recouped the earlier losses, to end the morning session unchanged at RM4.49. 

Still, TM's share price has gained 17.5% year-to-date — it is among the few rare big cap stocks that are currently in the positive zone. 

Affin Hwang Capital research analyst Isaac Chow forecasted TM's core net profit in 2020 to dip by 30% year-on-year due to expected lower revenue from voice, internet and other businesses. He anticipates TM to post a net profit of RM659.9 million for the financial year ending Dec 31, 2020 (FY20), a 4.3% growth from RM632.7 million in FY19.

"In our view, the valuation (of TM) looks pricey, considering its uninspiring revenue and profit outlook, weak domestic economic conditions and rising competition in the fixed broadband and enterprise market. 

“In view of the unfavourable risk-reward proposition, we downgrade Telekom to 'sell' (from 'hold')," Chow wrote in his note. 

Chow, however, is raising its 12-month target price to RM3.55, from RM3.38 previously, after rolling forward his valuation horizon to 2021.  

JF Apex Securities research analyst Lee Cherng Wee also reduced his revenue and earnings per share forecast for FY20 by 9% and 17% respectively.

However, Lee expects TM's earnings to improve in the second half of 2020 as the company resumed its unifi installation only in late-April while other businesses are expected to pick up later.

"Potential catalyst is the inclusion of the stock in the FBM KLCI during the mid-year review of the benchmark index’s component stocks," he added.

Kenanga Research analyst Clement Chua concurred that TM is likely to be included into the FBM KLCI in the upcoming June review given its current market capitalisation of RM16.91 billion.

"We believe investors are also aware of this which could prove to be a positive short-term rerating catalyst for the stock should it materialise. However, we anticipate the stock could see a correction should it face more challenges in the medium term," Chua commented in his quarterly result note.

Chua noted that demand for data will likely be on the rise given the increase in work-from-home set-ups. As such, he said the migration to fibre-based unifi would continue as consumers demand faster and more stable internet.

"Though, there will likely be challenges on the enterprise/SME businesses dragged by the economic slowdown from the MCO, which we believe may pose some default risks.

"On the flipside, management continues to strive for a leaner cost structure with constant renegotiations and retraining of staff to be sales-oriented, to adapt in a slowing economy. Meanwhile, the group persists with its 5G ambition, albeit delayed with MCMC refocusing its priorities to Covid-19-related efforts," he added.

In its quarterly result release, the telecom giant acknowledged a challenging outlook as there are many uncertainties as the Covid-19 crisis is still unfolding.

Nonetheless, the group stressed that it is committed to maintaining business profitability, leveraging new avenues at the onset of a “new normal” and adapting to new challenges.

TM’s net profit for the first quarter of 2020 (1QFY20) shed by about 50% to RM152.52 million, compared to RM308.28 million a year earlier, due to lower contributions from its unifi internet business and TM wholesale division.

Earnings per share for 1QFY20 fell to 4.05 sen, from 8.2 sen previously, the telco's exchange filing showed.

Quarterly revenue fell nearly 8% to RM2.56 billion, from RM2.78 billion, following a reduced contribution from voice services on lower usage, and a lower internet services contribution due to the Streamyx downward price adjustment since September last year.