KUALA LUMPUR (March 10): Telekom Malaysia Bhd (KL:TM) could pay higher and more frequent dividends, with its cash pile rising due to its strong earnings growth and balance sheet, CGS International flagged on Monday.

Dividend payouts will move to the upper end of its policy to distribute 40% to 60% of net profit, CGS International said in a note. The state-owned fixed-line operator also appears willing to pay special dividends if its cash levels rise, as shown in 2023 and 2024, the house observed.

“Our recent meeting with TM points to a greater focus on enhancing long-term shareholder value and acknowledgement of its falling leverage levels,” CGS International said in a note.

The house also raised its target price (TP) to RM8.70, nearly 12% above the consensus and some 26% premium to TM’s current price of RM6.90, and kept the stock on an ‘add’ call.  

Shares of TM have rebounded from this year’s lows in January, after the company reported stronger-than-expected results. Analysts expect steady revenue growth from robust demand at its wholesale and enterprise segments to cushion any pressure on the retail front.

A large majority of research houses are still positive on the stock, with 18 ‘buy’, three ‘hold’ and two ‘sell’ calls. The average 12-month TP is RM7.79, according to Bloomberg.

Falling financial leverage will be the biggest drag on TM’s return on equity (ROE) in 2025-2027, CGS International cautioned. “We believe the management is paying more attention towards addressing this issue going forward,” the house said.

Net debt as a proportion of earnings before interest, tax, depreciation and amortisation (Ebitda) — a measure of financial leverage — may fall to just 0.1 times by the end of 2027, according to CGS International’s estimates.

That compares to 0.6 times at the end of 2024 and the industry’s two times.

An increase in financial leverage generally amplifies returns on equity from operating income by boosting the effect of each ringgit earned, while a decrease in financial leverage diminishes the same effect.

“We see strong earnings delivery and higher [dividends per share] as key catalysts,” the house noted, adding that TM is trading at an undemanding 14 times forward earnings while offering an 18% ROE and 4.2% dividend yield.

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