Investment Highlights

• We reiterate BUY on Telekom Malaysia (TM) with an unchanged DCF-based fair value of RM7.10/share based on a WACC of 6.2%, terminal growth rate of 2% and neutral ESG rating of 3 stars. This implies an FY22F EV/EBITDA of 6x, in line with its 3- year average.

• TM has announced its participation in a consortium to build the SEA-ME-WE 6 submarine cable system which links Malaysia with multiple countries including Singapore, Bangladesh, India, Sri Lanka, Maldives, Pakistan, Oman, Djibouti, Saudi Arabia, Egypt and France (Exhibit 1).

• This new submarine cable will land at TM’s new cable landing station in Morib, Selangor and is the latest addition to TM’s 4 other international cable landing sites. This is a key cable landing site for Malaysia as the location is close to most hyperscalers’ data centres. The previous SEA-ME-WE 3 cable lands at Penang and Mersing, while SEA-ME-WE 4 and SEAME-WE 5 land in Melaka.

• The new submarine cable system, expected to be completed in 1Q2025, is 19,200km long and will have more fibre pairs to more than double the capacity compared to previous SEAME-WE cables. The submarine cable will provide TM with one of the lowest latency routes between Malaysia and Europe, providing an additional layer of network diversity and resilience for heavy traffic between the two regions. With the open cable system concept and a design capacity of more than 100Tbps, the latest investment will give consortium members complete control over their traffic management.

• Prior to this, TM has also made investments in other submarine cable systems for various international cable routes including SEA-ME-WE 3, SEA-ME-WE 4, and SEA-MEWE 5. TM currently owns and leases 30 submarine cable systems spanning more than 320,000km globally.

• The other consortium participants are Bangladesh Submarine Cable Company Ltd., Bharti Airtel Ltd., Dhivehi Raajjeyge Gulhun PLC (Dhiraagu), Djibouti Telecom SA, Etihad Etisalat Company (Mobily), Orange (France), Telecom Egypt (TE), PT Telekomunikasi Indonesia International (Telin), Singapore Telecommunications Ltd., (Singtel), Sri Lanka Telecom PLC (SLT) and Trans World Associates (TWA).

• This is part of TM’s capacity expansion programme as the national fibre-based digital connectivity provider. Assuming the subsea cable costs US$50K/km (similar to the Asia Submarine-cable Express), we estimate that the new cable system could cost over US$1bil. However, given the cable’s multiple consortium partners, we believe TM’s all-in capex will remain manageable and fall within our FY22F–FY25F capex/sales ratio assumption of 18%.

• Even though concerns have risen on the potentially high fixed wholesale capacity charge from Digital Nasional’s 5G network, rising data traffic from 4G and 5G usage will mean escalating demand for TM's nationwide fibre backhaul infrastructure, and notably, value-added services above the current mandatory standard access pricing regime. All in, 5G rollouts could positively levelise the cellular playing field for TM’s quadplay ambitions against its larger operators.

• Given TM’s critical role in the MyDigital initiative with its ownership of the nationwide fibre network, we expect a faster pace of growth for its wholesale revenue beyond FY21F. Likewise, TM One’s longer term revenue growth could also accelerate with the group’s appointment as the sole Malaysian cloud provider for government data.

• The stock currently trades at an attractive FY22F EV/EBITDA of 5x vs. its 3-year average of 6x, with a fair dividend yield of 3%.

Source: AmInvest Research - 22 Feb 2022