• We view the joint venture between Telekom Malaysia Bhd (TM) and Singapore Telecommunications Ltd (Singtel) as a positive move, aligning with Asia's thriving data center (DC) market and offering potential benefits for telco players amidst stagnant mobile monetization.

• TM is confident that the joint venture will attain robust EBITDA margins comparable to Nxera's, driven by the expectation of securing competitive rates akin to those achieved by global data centers.

• The group intends to designate around 5% of the data center's layout for AI needs, with room for future expansion.

• Alongside the new DC, TM is doubling the capacity of its Klang Valley and Iskandar Puteri DCs to 40MW, and exploring further growth opportunities in the DC business.

• We view the partnership between TM and Singtel to build an advanced data center in Johor as a forward-looking initiative that will enhance TM’s competitive edge in the digital infrastructure market.

• We maintain a BUY call with a higher TP of RM7.77 (from RM7.08) as we raise our DCF-based TP to reflect a long-term growth rate of 2% (from 1%).

The joint venture is anticipated to achieve healthy EBITDA margin

To recap, Telekom Malaysia Bhd (TM) and Singapore Telecommunications Ltd (Singtel) are partnering to establish new data center facilities in Iskandar Puteri, Johor, through a joint venture named ST Dynamo DC. TM’s unit, TM DC Educity Sdn Bhd, and Singtel’s subsidiary, Nxera My Pte Ltd, are involved, with TM DC Educity holding a 51% stake. TM recently hosted a conference call to clarify details about the joint venture. We view this JV positively as it aligns with Asia's booming data center market, potentially helping telco players offset flat mobile monetization. Specific financial details such as margins and total costs are still lacking at this stage. However, TM has expressed confidence that this joint venture will achieve healthy EBITDA margins similar to those of Nxera, supported by the anticipation of obtaining competitive rates comparable with those secured by international data centers. Note that the group has indicated that the project is expected to be completed in 2Q26, with significant earnings contributions anticipated starting in FY27 onwards.

Allocates 5% capacity for AI with flexibility

TM has commenced pre-sales activities to engage potential customers. However, to secure definitive commitments, the group must first ensure the availability of land, power, and water supplies. Once these foundational elements are in place, TM can finalize partnerships and contracts for the project. The company anticipates achieving full utilization of the data center within 2-3 years of its operational launch. Additionally, TM plans to allocate approximately 5% of the data center's design for AI-related requirements, with potential for expansion. Specific needs such as liquid cooling will be integrated into the data hall. While air cooling will initially be utilized in some sections, TM will install liquid cooling systems to meet precise operational demands.

TM doubles Klang Valley and Iskandar Puteri DC capacity to 40MW

TM currently operates flagship data centers, Twin-core Tier-3 facilities in Cyberjaya (KVDC) and Iskandar Puteri (IPDC), each offering 20MW capacity. TM has indicated that, alongside the new DC, it is doubling the capacity of its Klang Valley and Iskandar Puteri DCs to 40MW, and exploring further growth opportunities in the DC business. Additionally, we believe that this will significantly expand data center capacity, which is also crucial for deploying 5G technology, particularly for businesses using data-intensive applications across various industries. This expansion could lead to increased 5G monetization in the enterprise segment.

Maintain a BUY call with a higher target price of RM7.77.

We make no changes to our earnings forecast at this juncture, as we anticipate significant earnings contributions will be beyond FY26. We maintain a BUY call with a higher TP of RM7.77 (from RM7.08) as we raise our DCF long-term growth rate to 2% (up from 1%) and a WACC of 7.4%. We believe that the collaboration between TM and Singtel to develop a cutting-edge data center in Johor is a forward-thinking step that promises to strengthen TM’s competitive position in the digital infrastructure market. Looking ahead, we anticipate several factors will drive the rapid development of data centers both locally and globally i.e., (i) the ongoing transition to cloud computing, (ii) the increasing volume of data generated by consumers and businesses, and (iii) the rise of generative AI. Notably, Bloomberg Intelligence projects that the generative AI market will grow from USD40bn in 2022 to USD1.3tn over the next decade.

Source: BIMB Securities Research - 24 Jun 2024