Results

1Q14 turnover of RM131.9m was translated into core net profit of RM29.4m, accounting for 19% and 18% of HLIB and street’s full year forecasts, respectively.

This is deemed to be within expectations as 1Q is seasonally weaker and more high-margin global bandwidth sales ahead will further boost earnings (1Q13 core net profit net of nonrecurring contribution was 20% of FY13).

Deviations

Within expectation.

Dividend

None.

Highlights

YoY: revenue was flat as 1Q13 was artificially inflated by non-recurring sales (one-off contracts and global bandwidth sales) amounted to RM13m. Excluding that, revenue would have grown 10% organically on the back of higher data and data centre sales. The effect on PBT which declined 16% would also reverse and gained RM6.9m or expanding 28% instead, if the above mentioned items were adjusted.

QoQ: Top line contraction of 12% was also distorted by nonrecurring revenues which amounted to RM17.4m. If adjusted, it would have been flat, despite in a traditionally soft quarter.

TdC will look into unlocking the potential of the combination of data centre and global bandwidth businesses to fuel growth as well as expanding its presence regionally. Locally, TdC expects higher demand from cellcos for network modernization and LTE rollouts.

TdC also highlighted the potential of margin compression in FY14 as a result of such capital intensive initiatives. However, it believes that these are necessary to ensure sustainable growth in the future and are expected to reap benefits over the longer term.

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

Maintained.

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 with unchanged SOP-derived TP of RM4.87 (see Figure #3). For every 1% change in DiGi price, TdC fair value will change by 2 sen.

Source: Hong Leong Investment Bank Research - 27 May 2014