Highlights 

The conference call was concluded with a slight positive note as overall operations are well executed and long term growth plan remains intact supported by healthy industry outlook.

Wholesale: intense competition is constantly felt as returning customers expect discounts by default, thus putting pressure on margins. However, price erosion intensity remains the same as last year, whereby large accounts would demand for ~20% discount during contract renewal while small ones would ask for ~10%. To mitigate this impact to the bottom line, TdC relentlessly explore ways to reduce costs, including cascading part of the erosion to suppliers, prudent in network upgrade / maintenance and operate in a leaner manner.

Wholesale’s EBIT margin for newly acquired customer is between 20% and 25% while existing customer’s contract renewal would yield higher between 40% - 45% due to lower depreciation charges.

Data centre: since the capacity expansion in 4Q12, the take up is positive and it expects full utilization rate by end of FY14. Nonetheless, concern remains due to the looming overcapacity in Cyberjaya whereby AIMS Cyberjaya is less than 35% occupied while Menara Aik Hua occupancy is more than 90%. Also, TdC has secured the master tenancy of Menara Aik Hua from PNB, granting flexibility in its future expansions.

Network expansion: further roll-out of Astro buildings and commitment to Asia Pacific Gateway (APG) construction expected to drive CAPEX in the remaining FY13. APG’s construction is on schedule and is expected to be ready for service by 1Q15.

TdC opined that the sector is still undergoing healthy growth with positive outlook. It continues to focus and strengthen footprint in metro and urban areas as it sees opportunities by covering blind spots including industrial areas.

Catalysts

• Exponential global demand for data bandwidth with quality.
• LTE node fiberization.
• Colocation, cloud computing and virtualization driving higher demand for data centre.
• Dividend distribution

Risks

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

Forecasts

Maintained.

Rating

HOLD, TP: RM4.03

Positives - by tapping into new growth areas such as global bandwidth and data centre businesses as well as synergistic benefits from enlarged group.

Negatives – price erosion in wholesale segment.

Valuation

Maintain HOLD rating on the equity with unchanged SOPderived TP of RM4.03 (see Figure #4). The fair value of TdC’s DiGi stake remained unchanged at RM4.94 per share. For every 1% change in DiGi price, TdC fair value will change by 2 sen.

Source: Hong Leong Investment Bank Research - 25 Nov 2013