Highlights

Entered into a conditional Share Sale Agreement (SSA) with Gapurna Global Solution SB (GGS) to acquire the entire equity interest in GTC Global SB (GTC) for a total cash consideration of RM45m.

The principal activities of GTC are to supply, install, test, commission and maintain integrated security surveillance systems and broadband solutions.

The price tag was arrived on a willing seller willing buyer basis after taking into considerations of:

1. GTC’s FYE Dec 2012 audited PAT of RM3.52m; and

2. GTC’s FYE Dec 2012 audited net asset of RM44.4m.

The proposed acquisition will be financed via internally generated funds and expected to be completed by 1Q14.

TM believes that GTC will complement TM’s core competencies as well as broaden its capabilities in ICT to better serve its range of customers, particularly in the enterprise and government segments.

Financial Impact

No problem in funding this acquisition as TM is sitting on a huge cash pile of RM3.4bn as of 1H13.

Valuation implies 12.8x FY12 P/E and 1.0x FY12 P/B, relatively cheap compared to TM’s.

Comments

A positive development as this will enhance TM’s product portfolios and strengthens its footprint in targeted segments. Besides, synergies can be extracted as TM’s forte in data IP networks and transmissions is a crucial integral of advance security surveillance solution.

GTC clients consists of town councils, state governments and hypermarkets / supermarkets including MPSJ (Subang Jaya), Cyberview, Selangor / Seremban state councils, MPPD (Port Dickson), RapidKL and Home Ministry (KPKT).

As of date, GTC’s long term order book has almost doubled from RM245m to ~RM445m.

MRCB’s rationale behind the disposal is to conserve resources in core business in view of the CAPEX intensity of those sizable projects, while we believe that this will not be a concern to TM.

Catalyst

• Earnings uplift from HSBB and ICT-BPO.
• Decent dividend yield.
• Improving ROE with more efficient capital structure.

Risks

Regulatory risks, irrational competition, acceleration of global bandwidth price erosion and being a dumb pipe.

Forecasts

Maintained.

Rating

BUY, TP: RM5.82

Positives – Earnings uplift mainly from HSBB, ICT-BPO and further cash management potential, near monopoly of fixed telco market in Malaysia.

Negatives – Unattractive wholesale pricing could limit wholesale growth. HSBB equipment subsidy.

Valuation

Reiterate our BUY rating on TM with unchanged DDMderived TP of RM5.82 using WACC of 5.4% and TG of 0%.

Source: Hong Leong Investment Bank Research - 28 Nov 2013