Highlights

The “potong” saga ended with TM as the victor as it will emerge as the major shareholder of P1 through the proposed investment (see Figure #1).

Assuming full redemption of EB by GP, TM’s total investment will amount to RM1.34bn over 3 to 5 years with eventual holdings of 59.1% in P1.

Under the RM1.65bn CB program, TM is entitled to 60%, while SKT and GP with 25% and 15% respectively.

With this investment, TM will have access to two blocks of valuable spectrums (2.3GHz and 2.6GHz) as well as 2k radio sites and become a new formidable entrant in wireless / 4G LTE market, leveraging on GP and SK Telecom’s experience and expertise.

This proposal is subject to GP’s shareholders, MCMC and SC’s approval and slated to complete in 3Q14.

In a separate exchange filing, dividend reinvestment scheme (DRS) was also proposed and will apply for DRS to be applicable to its FY13 final single tier divided of 16.3 sen.

Financial Impact

On the consolidated basis:

1. Gearing is expected to increase from 0.90x to 0.99x;

2. Earnings and EPS erosion as P1 is still bleeding despite achieving EBITDA positive since 1Q12.

Comments

Positive about this development which demonstrates to be synergistic while continues to chart TM’s long term roadmap. However, P1’s financial health will be a drag to TM’s earnings in the short term.

This venture will be earnings accretive judging from wireless’ EBITDA margin of 45%-52% compared to fixed’s 30%-35%.

Its extensive nationwide fibre network provides TM the prerequisite and platform to venture into mobile market.

Inevitable strategy as cellcos are also reducing dependency on fixed telcos by building own fibre backhaul, thus this new income stream will compensate any future shortfall.

Other potential impacts include accelerated depreciation of WiMAX infrastructure and user devices due to swift transition to LTE (negative) and tax benefits due to accumulated losses in P1 (positive).

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

HOLD, 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 pricing could limit wholesale growth. HSBB equipment subsidy.

Valuation

Downgrade the stock from TRADING BUY to HOLD with unchanged DDM-derived fair value of RM6.05 using WACC of 5.7% and TG of 1%.

Source: Hong Leong Investment Bank Research- 28 Mar 2014