Investing in Telcos for Halal Income: Telekom Malaysia versus Singtel

Both are halal dividend stocks but with vastly different profiles.

Emerging markets have been a hot topic ever since the Federal Reserve has begun cutting interest rates. Asian stock indices, in particular, have strengthened, Singaporean and Malaysian markets included. 

The rallies may be fizzling out, but quality companies abound, and they deserve attention. Established ones with long-term potential should be of special interest to dividend investors. The two oldest telecommunication giants of Southeast Asia are prime examples. 

Government-linked Telekom Malaysia (TM) and Singapore Telecommunications (Singtel) have taken different routes to maturity but are now banding together around a newly found growth emphasis on technology. Muslim investors, take note.

Photo by Alex Wong on Unsplash

Halal Stock: Telekom Malaysia (KLSE:TM)

• Market cap: MYR25.0b (US$5.71b)

• Growth rates

  • Revenue (year-on-year): 3.2%

  • Net income (3-year): 16.5%

• Profitability

  • Gross profit margin: 41.6%

  • Net income margin: 14.6%

  • Return on equity: 19.9%

• Dividends

  • Trailing dividend yield: 4.3%

  • Future dividend yield: 3.9%

  • Payout ratio: 60%

• Valuation

  • Price-to-earnings ratio: 13.9x

Telekom Malaysia is a bit of a dinosaur in telecommunications. It holds leadership positions in fixed-line telephone and broadband Internet segments, but the going has been tough in recent times because of cordless competition. Other offerings like mobile and TV have not made much of a splash. 

But there is a ray of hope in data transmission — a service riding high on the back of a frenzy over data centres and artificial intelligence. Fortunately for TM, it is not an insignificant opportunity. The fact that it has the largest network infrastructure in the country, along with a vast system of international subsea cables, is certainly helping. 

The newest initiative Nxera, a joint venture with Singtel, will set up “a sustainable, hyper-connected AI-ready data centre campus” in Malaysia’s southernmost state of Johor. Operations are supposed to start in 2026 with 64 megawatts of capacity (which may be scaled to 200 megawatts by 2030). With a 51% stake, TM is investing MYR588m of initial capital.

Funding will not be a problem for TM. It has an enviably robust balance sheet supported by strong free cash flows. Cost pressures, which have been impacting earnings, are being addressed through optimisation measures.  

Halal Stock: Singapore Telecommunications (SGX:Z74)

• Market cap: S$51.2b (US$38.60b)

• Growth rates 

  • Revenue (year-on-year): -3.3%

  • Net income (3-year): -0.55%

• Profitability

  • Gross profit margin: 24.7%

  • Net income margin: 7.1%

  • Return on equity: 3.9%

• Dividends

  • Trailing dividend yield: 5.4%

  • Future dividend yield: 6.3%

  • Payout ratio: 311%

• Valuation

  • Price-to-earnings ratio: 51.4x

Singtel too is the original telephone service provider in its home market of Singapore and the dominant player. But unlike TM, it has been more actively diversifying, both product wise and geographically. Its biggest subsidiary Optus is an Australian telco with the number two position in mobile telephony. Singtel also owns NCS, a local information technology firm. 

It is the newest unit, however, that shows the most promise. Digital InfraCo has been formed to manage Singtel’s data centres, subsea cables and cloud technology. This reorganisation is part ST28, a strategy launched earlier this year to leverage digitisation as a secular trend to inspire a new phase of growth. Nxera — Digital InfraCo’s data centre arm — along with NCS are meant to become the twin engines of this growth.

Singtel has actually been restructuring for a good while, in an effort to lift profitability and credit rating. Before ST28, the group has been occupied with more foundational work of operational improvements and capital recycling. It has managed to sell off some loss-making assets lately, though its most successful divestment was in 2017 of NetLink Trust, the manager of the island’s ultra-high-speed broadband network. 

To realise its growth ambitions, Singtel might need to monetise still more. It cannot take on too many additional liabilities on its balance sheet either because of existing burden of leverage.

Takeaway: Halal Telco Stocks for Dividend Income

The two Asian telcos, both blue-chips, are dissimilar in stock performance as well. Bursa Malaysia’s TM returned more than 100% over the past five years in total. Singtel’s showing, on the other hand, has been unimpressive: Z74 on the Singapore Exchange yielded a modest 15% with dividends included.

The biggest reason for Singtel’s underwhelming performance has been financial weakness (not least due to recurring issues with Opus). But the group’s fortunes may be on the mend; the stock went up more than 30% year-to-date owing to improving financials and investor optimism about the new plan. Yet analysts remain cautious.

TM, in contrast, has been lavished with Buy recommendations. It is helpful that the shares are affordable (and so much more affordable than those of Singtel given the recent run-up).

With any of the two stocks though, Muslim investors will also benefit from halal dividends — in the range of 4-5% — that both reliably distribute. If and when their growth investments pay off, the gains will be substantial. And for shareholders that would ultimately lead to higher future payouts.

Disclaimer: Nothing you read on Tayyib Finance constitutes financial advice. Nor is there a guarantee of Shariah compliance of any particular stock at any particular time, since ‘Shariah compliance’ is fluid depending on the provider of judicial opinion and must be regularly affirmed. Do your own research.

Here are a couple more picks for halal Southeast Asian stocks paying dividends: