KUALA LUMPUR (March 17): Telekom Malaysia Bhd (KL:TM) is expected to dish out better dividends following improved earnings visibility and prudent capital allocation, making it an increasingly attractive defensive play.
Public Investment Bank sees the recent share price weakness as a buying opportunity, maintaining an 'outperform' call on the telco with an unchanged target price of RM8.80.
"We came away from a recent meeting with TM feeling reassured of its medium-term outlook, as all business segments are expected to grow based on strategies that have been laid out," the research firm said in a note on Tuesday.
The house now assumes a higher dividend payout by Telekom from the financial year ending Dec 31, 2026 (FY2026) onwards, given growth across all segments and better capital outlay.
It noted that Telekom has been paying 31.0 sen in total dividend per share (DPS) in FY2024 and FY2025 respectively, and it expects FY2026 DPS to be "at least on par with that at 31 sen".
The house revised its DPS for FY2026/ FY2027/FY2028 by 25.5%/25.5%/19.4% to 31.0 sen/32.0 sen/32.0 sen respectively, translating into a more attractive dividend yield of 4.2%-4.3%, from 3.2%-3.5% previously.
Meanwhile, the house said Telekom's revenue for FY2026 is expected to be higher by 4.6% y-o-y, driven by low single-digit growth from Unifi, low- to mid-single-digit from TM One, and a potentially high single- to double-digit growth from TM Global.
TM Global was noted as the group's most promising segment with full recognition of revenue from the TM Nxera data centre (DC) in Iskandar Puteri from FY2027F onwards.
PublicInvest noted that demand has been strong for the DC, with management mulling pricing and sizing strategies to optimise income as interests surface to offtake 100MW or higher.
The initial capacity of 64MW will come online this year, backed by a 280MW multi-year electricity deal with Tenaga Nasional Bhd (KL:TENAGA), it added.
On the other hand, costs are expected to be higher, mainly from manpower due to one-off expenses for voluntary separation requests, for which management has allocated about RM300 million with an expected payback period of 1.9 years.
It said some roles will be merged or automated by AI systems, leading to expected manpower cost savings from FY2028 onwards.
Meanwhile, capex/revenue ratio is guided higher at 18%-20% in FY2026 (vs 16.1% in FY2025), primarily for further fiberisation, submarine cable projects and DC expansion, with 50% allocated for support (mainly DCs), 31% for access (fiber network and submarine cables), and 19% for core (technology).
On the 5G front, TM might be locked in with its existing agreement with Digital Nasional Bhd (DNB) for another few years as a worst-case scenario, but could eventually enjoy lower access cost with the new 5G access agreement with U Mobile once the termination is completed.
"TM remains our top pick in the sector as it stands to benefit from increasing demand for data and connectivity in the region through further expansion of its network infrastructure, broadband and international bandwidth," said PublicInvest.
At press time on Tuesday, TM shares gained 10 sen or 1.4% at RM7.47, translating into a market capitalisation of RM28.7 billion.
According to AskEdge data, the company is currently trading at a price-earnings (P/E) ratio of 16.5 times, which is lower than most peers. However, the company's price-to-book ratio of 2.7 times is higher than most peers.