Telekom Malaysia Bhd
(Dec 30, RM3.51)
Upgraded to trading buy at RM3.51 with fair value of RM3.55: The media reported last Wednesday that TM is probing an international bribery scandal which led to a US$85 million (RM258.4 million) contract for Alcatel Lucent (Alcatel), which sources said surfaced in 2007 but was never investigated.
The Malaysian Anti-Corruption Commission (MACC) said last Wednesday it will “verify with parties concerned” before proceeding with any potential probe.
A filing in the United States’ Securities and Exchange Commission (SEC) said two Malaysian consultants were paid a total of US$700,000 for “non-public information” related to competitors’ pricing and bids, believed to be for its then subsidiary Celcom’s new 3G mobile services which was launched in 2005. Also, it is understood that TM director Datuk Nur Jazlan Mohamed quit as audit committee chairman after the irregularities were found but was not investigated. This suggests poor corporate governance on the part of TM.
The bribery scandal raises the possibility that the contract may have been inflated, though the SEC filing suggests Alcatel appears to have undercut its rivals to win contracts by finding out the quotes from rival bids. Nonetheless, we are alarmed to understand from media reports quoting sources that “the equipment was later scrapped”.
As the event took place in 2007, any potential further write-offs should not significantly affect core earnings as: 1) the assets involved would have depreciated somewhat (or written off completely); and 2) they are non-cash items. Whether TM will seek recourse, if any, with Axiata as the equipment was related to Celcom’s operations, remains to be seen.
The risks include: 1) further fixed-to-mobile substitution leading to declining revenues; 2) low returns from HSBB project; 3) weaker-than-expected earnings, which could adversely affect dividend payments and 4) further irregularities on TM’s purchasing procedures.
We have left our earnings forecasts unchanged.
In the short-term, we expect sentiment on the stock to be hurt by the news but we still like TM for potential active capital management. We upgrade TM to trading buy and view any dips as opportunity to accumulate the stock, for the high likelihood of significant special dividends, which may result in total dividend yield of 20.9% in 2011. Our fair value of RM3.55 is retained based on a required net yield assumption of 5.5% on the minimum RM700 million dividends. — RHB Research, Dec 30
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