KUALA LUMPUR (Feb 19): State-owned fixed-line operator Telekom Malaysia Bhd (TM) needs to return more cash to its shareholders to avoid a long-term drag in its return on equity, CGS-CIMB said. 

Without optimising its balance sheet, TM’s net debt as a proportion of earnings before interest, taxes, depreciation and amortisation (Ebitda) could decline to 0.4 times by the financial year ending Dec 31, 2025 (FY2025), and further to 0.2 times by FY2026, according to CGS-CIMB’s estimates.

This translates into the need to return an additional 68 sen per share in excess cash to shareholders through FY2024 just to maintain TM’s already low net debt to Ebitda ratio, the research house said.

TM’s cash build-up comes at a time of sustained earnings and elevated margins from lower tax rates.

For TM, CGS-CIMB maintained its ‘add’ rating, equivalent to a 'buy' call, with a target price of RM7.30, valuing the company at 5.6 times the projected enterprise value multiple for FY2025.

“We see continued earnings delivery, coupled with potentially higher dividends, providing the key rerating catalysts for the stock over the next 12 months,” CGS-CIMB wrote in a note to clients.

At 0.9 times net debt-to-Ebitda as at end-September 2023, TM’s net debt was lower than pure play Malaysian mobile operators CelcomDigi Bhd at two times and Maxis at 2.3 times, CGS-CIMB noted.

Capital expenditure for FY2023 to FY2026 meanwhile will likely come in at 18%-19% of sales, within the management’s 18%-20% guidance for FY2023 but above the long-term 16-18% base without special projects, further suggesting room for more cash distribution or higher dividend payout ratios, CGS-CIMB added.

As at the time of writing on Monday, TM shares had increased three sen or 0.52% to RM5.83, giving the group a market capitalisation of RM22.37 billion.