Highlights

Local dailies reported that TM will be signing an agreement with global telcos to form a consortium for a new continental submarine cable system.

As per naming convention, Southeast Asia - Middle East - Western Europe 5 (SEA-ME-WE 5) will be linking up the 3 continents of Asia, Africa and Europe.

Quoting Bangladeshi local daily, this cable will connect 20 countries, where the cable is expected to reach Patuakhali in Bangladesh in 1Q16.

It added that Singapore, Indonesia, Thailand, Myanmar, Sri Lanka, Pakistan, UAE, Oman, Saudi Arabia, France, Australia and Taiwan will be part of the consortium.

It is believe that SEA-ME-WE 5 will be largely taking the same route as its predecessors, SEA-ME-WE 3 (see Figure #1) and SEA-ME-WE 4 (see Figure #2).

However, it was also reported that this new cable will be more expensive than the former which was completed in Dec 2005 with a cost of RM1.63bn.

Comments

Another positive news flow in a week that TM is expanding its presence and global reachability. This would further improve its global and wholesale division’s contribution which currently stands at 16% as of FY13.

Based on the successes of SEA-ME-WE 3 and 4 which TM also took part, we do not foresee major execution and funding risks given that it is usually backed by reputable telcos.

Will be competing with another new cable called Asia-Africa- Europe 1 (AAE-1) which has almost similar route (see Figure #3). It was reported that TdC is one of the stakeholders of AAE-1.

Comparisons between related cables are shown in Figure #4.

Catalyst

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

Risks

Appreciation of USD, regulatory risks, irrational competition and acceleration of global bandwidth price erosion.

Forecasts

Maintained.

Rating

TRADING BUY, TP: RM6.05

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

Recent bullish share price performance has resulted in less than 10% upside to our fair value. However, we believe that investors are finally warming up to TM’s positive prospect and this momentum is expected to continue driving share price. Thus we only downgrade the stock from BUY to TRADING BUY with unchanged DDM-derived fair value of RM6.05 using WACC of 5.7% and TG of 1%.

Source: Hong Leong Investment Bank Research - 7 Mar 2014