KUALA LUMPUR (Oct 30): Telekom Malaysia Bhd (KL:TM) has room to raise its dividend payout on the back of a healthier balance sheet and stronger cash flow, according to Hong Leong Investment Bank (HLIB).

In a note to clients on Thursday, HLIB projected TM’s payout ratio to increase to 70% in the financial year ending Dec 31, 2026 (FY2026), and further to 80% in FY2027, from the current assumed 60% payout for FY2025. This would lift TM’s net dividend yield to about 4.7%-5.7%.

HLIB said TM is currently reviewing its dividend policy, which now targets a payout range of 40%-60%, with an announcement expected alongside its FY2025 results in February 2026.

“The review aims to optimise capital allocation by returning excess cash to shareholders through higher dividends, while maintaining flexibility to reinvest in growth areas such as data centre projects. 

“Possible options could include setting a higher minimum payout floor and/or raising the upper end of the payout range,” HLIB told its clients. 

HLIB noted that TM’s heavy investment phase — including the roll-out of high-speed broadband under government partnerships (HSBB, HSBB2, SUBB) and the Jendela initiative — has long passed its peak. 

With capital expenditure now normalised, TM has been generating stronger free cash flow, which it has used to reduce debt and reward shareholders.

As a result, TM’s net debt-to-earnings before interest, taxes, depreciation and amortisation (Ebitda) ratio has fallen to 0.6 times, well below its mobile peers’ average of 2.0-2.2 times, giving it ample room to sustain higher dividends going forward.

Following the revised dividend payout assumptions, HLIB said it trimmed its FY2025-FY2027 earnings forecasts slightly by 0.6%-1% for TM to reflect capital allocation adjustments.

The research house maintained its ‘buy’ call on TM and raised its target price to RM8.50 from RM7.90, noting that valuations remain undemanding at 14.8 times FY2026 price-earnings ratio with an attractive 4.7% net yield based on a 70% payout.

"We see potential upward revisions of TM’s dividend policy and positive data centre-related news flow as key rerating catalysts,” HLIB said, adding that TM remains a key enabler of Malaysia’s broadband and 5G roll-out, supported by its extensive fibre backbone and expanding data centre capacity.

At the time of writing on Thursday, shares of TM were one sen or 0.14% lower at RM7.24, valuing the group at RM27.82 billion.