Highlights

As highlighted in our TM report titled “Second MEA Deal in a Week” dated 7th Mar, TdC finally announced its participation in the consortium to construct and maintain the Asia-Africa- Europe-1 (AAE-1) submarine cable system which spans ~25,000km connecting Asia to Europe through Middle East.

Enforced on 15th April, the Construction and Maintenance Agreement (C&MA) sets out various landing points along the cable route, including Hong Kong, Vietnam, Cambodia, Malaysia (Pontian Kechil), Thailand, Myanmar, Pakistan, India, Oman, UAE, Qatar, Yemen, Djibouti, Saudi Arabia, Egypt, Greece and France (see Figure #1).

AAE-1 is expected to commence construction in 2Q14 and targeted for completion in 2016.

TdC will secure 1.88Tbps, about 4.7% of AAE-1’s 40Tbps designed capacity deployed using 100Gbps technology.

Inked Supply Contact with TE Subcom, the vendor responsible to engineer, procure and construct the segments of AAE-1 between Malaysia, Thailand, Egypt and France.

TdC expects AAE-1 to provide diversity for APG’s capacity between Malaysia and Hong Kong and the allocation of capacity to Myanmar, Thailand, Cambodia and Vietnam will further support its regional expansion initiatives.

Financial Impact

Gross investment is ~USD44m which is expected to be funded by internally generated funds and borrowings.

Comments

A positive development as this strategic asset will further complement existing’s in terms of presence and reachability, thus grooming TdC to be a formidable regional fixed player.

The execution risk is expected to be minimal as the consortium is made up of 17 regional telco incumbents, including British Telecom, China Unicom, Chuan Wei, Djibouti Telecom, Estisalat, HKT, Mobily, Omantel, Ooredoo, PTCL, Telecom Egypt, Telecom Yemen, Vittel, OTEG, Reliance Jio and TOT.

Although AAE-1’s route generally overlaps with TM’s new SEA-ME-WE 5, we do not foresee any fierce competition as the latter is mainly for own consumption.

According to Cisco, although MEA’s Internet traffic volume is small relative to other regions, but it will be the fastest growing region with close to 40% annual growth rate in 2017 (see Figure #3).

Catalysts

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

Risks

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

Forecasts

Unchanged.

Rating

BUY, TP: RM4.87

Positives - by tapping into new growth areas such as global bandwidth and data centre.

Negatives – price erosion in wholesale segment.

Valuation

Reiterate BUY call after rolling over our valuations to FY15 yielding a higher TP of RM4.87 based on SOP, +23.0% from previous TP of RM3.96 (see Figure #4). For every 1% change in DiGi price, TdC fair value will change by 2 sen.

Source: Hong Leong Investment Bank Research - 16 Apr 2014