Bearish outlook for TM as earnings set to fall on mobile focus

Analysts are expecting the telco to be impacted by its mobile focus despite its lower operating expenses


TELEKOM Malaysia Bhd’s (TM) share price dropped almost 3% yesterday as investors dumped shares in the telecommunications company (telco), while analysts turned bearish of the telco’s future earnings prospects.

Many analysts expect the fixed-line giant to be impacted by its mobile focus despite its lower operating expenses.

The negative sentiment pushed TM stock 2.87% lower to close at RM3.39 despite the FTSE Bursa Malaysia KLCI (FBM KLCI) declined only 0.01%. Shares of TM have lost 16% of its value in the past five days and 15% in the last 30 days, according to Bloomberg data.

Thirteen analysts surveyed by Bloomberg have ‘Hold’ calls on TM shares, while 10 recommend to ‘Sell’ and four have rated the stock as ‘Buy’.

Last year was a difficult period for TM as its dominant hold on the fixed broadband space weakened with the implementation of the Mandatory Standard on Access Pricing (MSAP). TM’s earnings plunged 83.5% year-on-year last year.

Cost cutting initiatives have helped the telco lower its operating costs in the second quarter ended June 30, 2019. The company posted a net profit rise of 12%. However, revenue fell 6% due to declines in all products except data services.

Maybank Investment Bank Bhd maintained a ‘Hold’ call on the group with an unchanged target price of RM3.80, adding that despite TM’s cost optimisation efforts, there is a possible downside risk to its near-term earnings from the new management’s business plan.

“Management alluded to a more proactive stance on mobile going forward (including investing more on its network). This could potentially put pressure on near-term earnings with the mobile arm presently still in the loss,” the investment bank said.

BIMB Securities Sdn Bhd said it’s staying guarded amid TM’s new management’s aim, which appears to be focused on growing within the mobile space. The research firm downgraded the stock to ‘Hold’ with a target price of RM3.75.

“Management highlighted its plan to boost mobile in order to extract better synergy from the fixed broadband infrastructure. However, we reckon this would trigger a price war within the mobile space and could further deteriorate data yield,” it said.

JPMorgan Securities (M) Sdn Bhd also said it sees some of TM’s cost reductions — mainly in roaming and content as sustainable — yet it remains concerned on the earnings and dividend outlook.

The research house reiterated an ‘Underweight’ stance on TM with a target price of RM2.40, adding that the telco’s wireless strategy “has a negative read across for the wireless industry”.

“TM has revised lower its retail tariffs and downtrading is likely to pressure average revenues per user. Fixed broadband customers are at risks from new entrants and substitution by wireless services. In our view, TM’s earnings are likely to decline over the mid-term,” it said.

JF Apex Securities Bhd downgraded the telco to ‘Hold’ with an unchanged target price of RM4. It forecasts earnings growth to continue receiving support from cost optimisation.

Potential catalysts could come from the sale of TM’s non-core assets such as office buildings and the group’s subsidiary VADS Bhd, it said.

Kenanga Investment Bank Bhd downgraded the stock to ‘Market Perform’ with an unaltered target price of RM3.95. It expects earnings for the second half of 2019 to be softer as investment-heavy rollouts could bump up operating expenses.

Hong Leong Investment Bank Bhd (HLIB) maintained a ‘Buy’ recommendation on TM, with an unchanged target price of RM5.

“Although market competition remains intense with more players after the high-speed broadband and MSAP, we are particularly positive on its cost optimisation measures which are now yielding impactful outcome,” it said.

HILB said the group is a potential beneficiary of the National Fiberisation and Connectivity Plan, under which it could win the prized 700MHz spectrum.