TM asset sales a good move

Cash from disposal of its office blocks could be utilised for capex and/or reduce debts


Telekom Malaysia Bhd’s (TM) move to dispose of assets to strengthen its balance sheet is a positive step, said Kenanga Investment Bank Bhd.

The telecommunications company recently revealed its intentions to sell buildings and landbank to unlock value of its assets, following a tender bid called for its two buildings — Annexe 1 and Annexe 2 — located next to its headquarters in Bangsar, Kuala Lumpur.

Kenanga noted that the cash from the disposal of the two office blocks could be utilised for capital expenditure (capex) and/or reduce debts.

The investment bank stated that should the two office blocks be disposed of at the reserve price (RM585 million), and half of its parcels of land unloaded at 20% higher than its 2017 net book value, TM’s balance sheet could potentially strengthen by an additional RM1.1 billion in cash.

“Should all of the proceeds be utilised for lowering debts, the gross debt/earnings before interest, taxes, depreciation and amortisation for the financial year 2019 (FY19) could be reduced to 2.2 times (against 2.5 times initially), with gearing of 0.6 times (against 0.8 times),” Kenanga’s research note on Tuesday stated.

Kenanga downplays the prospect of a special dividend being paid with the cash raised, given TM is aiming to strengthen its cash position amid rising cost pressure and competition.

Kenanga believes TM is on the right track to enhance operational efficiency and strengthen its balance sheet with its active asset management move, but has made no change to its earnings estimates for FY19 and FY20, pending the outcome of the tender process.

TM published a tender notice recently for the 20-storey TM Annexe 1 and 33-storey Annexe 2 structures located next to Menara TM, and planned to close the submission on March 29.

The two leasehold office towers have a combined gross floor area of 679,015 sq ft, with a net lettable area of 468,772 sq ft.

The reserve price estimates range between RM273 million and RM312 million, implying a price of around RM755- RM1,027 per sq ft.

Kenanga has upgraded TM to ‘Market Perform’ with a higher discounted cashflow- driven target price of RM3.10 from RM2.50 previously, post lowering its weighted average cost of capital assumptions by 1% to 8.6% on expectations of better cash management ahead.

The downside risks to the recommendation include unfavourable changes in regulation; stiffer fixed broadband competition; and higher than expected operating expenses.

Upside risks to the call include favourable regulation framework; and stronger than expected top line and margin growth.