Highlights

In yesterday’s AGM, shareholders have approved the proposed distribution of 137.5m DiGi shares by way of dividend-in-specie, which work out to be 6 DiGi shares for every 25 ordinary shares of RM0.50 each in TdC. The distribution is expected to complete in June 2013.

On the domestic front in FY12, fixed line business continued to capture more market share (mainly from TM) in niche segments with wholesale and enterprise gained 2.0ppt yoy to 17% and 1.0ppt yoy to 6% respectively. In FY13, TdC expects higher demand from cellcos for node fiberization in preparation for LTE network rollouts.

TdC remains bullish on international business projecting Asia’s bandwidth demand growth to undergo a CAGR of 44.0% from 2010-2020 while broadband penetration rates remain low at 27.5%.

With 10% market share, AIMS will flourish riding on industry forecasted growth of 15%-18% benefiting from proliferations of cloud computing and corporate outsourcing.

Leveraging on their expertise and technical know-how, TdC is ready to grow their global bandwidth and data centre businesses into new markets in the region, favoring Indonesia, Philippines and Thailand.

To date, TdC has sold ~400Gbps of Unity Cable’s capacity in the form of both lease and IRUs.

Catalysts

• New acquisitions, when integrated as a group, will further enhance earnings due to volume synergies and the utilization of assets at owner-cost prices.
• Exponential global demand for data bandwidth with quality.

Risks

• Irrational wholesale pricing and competition, regulatory risks and a contraction in demand for wholesale bandwidth.

Forecasts

• Unchanged.

Rating

BUY, TP: RM5.14

• Positives - By tapping into new growth areas such as global bandwidth and node fiberisation as well as entering a series of synergistic acquisitions.
• Negatives – price erosion in wholesale segment.

Valuation

• Maintain our BUY call based on unchanged SOP TP of RM5.14. The fair value of TdC’s DiGi stake remained unchanged with RM4.79 per share. For every 1% change in DiGi price, TdC TP will change by 2 sen.

Source: Hong Leong Investment Bank Research - 21 May 2013