Highlights

The conference call was concluded on a positive note and TdC remains our top pick in the telco sector as our philosophy of fixed telco being an inevitable pre-requisite to sustainable data growth remains legitimate.

TdC stays upbeat on market outlook and targeting to achieve high-teens growth in FY14 on the back of insatiable data demand and data warehousing business.

Wholesale (domestic): rational pricing dynamics persists with cellcos being their major clients who are in the midst of 4G LTE rollouts and network modernization.

Wholesale (regional): exciting prospect as the investments in all 3 cables (Unity, APG and AAE-1) grant TdC with a global footprint. Bundled with Unity, TdC is preselling APG capacity with the value propositions of direct connectivity coupled with superior redundancy to the US and expects revenue recognition by late FY14. TdC also plans to do the same for AAE-1 next year prior to its completion in 2016. Synergy through bundling all 3 cables is expected to give margins a booster due to asset utilization at owner-cost prices, instead of lease pricing. Majority of the lease contracts are backed by customer orders, thus they are cancellable in favor of own cables. IRU sales yields high margin at 50%-60%, while leasing model lower at 20%-25%. The only drawback is the stubbornly high price erosion ranging 15%-20% and not being offset by higher volume as competition from global service providers heated up.

Enterprise: targeting for 10% yoy growth. TdC shared that data centre glut in Cyberjaya remains but it is not severely impacted as it is treated as secondary site to Menara Aik Hua and only for price sensitive customers. However, its Cyberjaya data centre is currently 50% filled with colocation priced at 10%-20% discount to Menara Aik Hua. Shortlisted Vietnam and Indonesia for potential entry to expand data centre business regionally.

TdC is interested in and currently evaluating the submarine cable proposed in Budget 2014 to increase internet coverage in Sabah and Sarawak at a cost of RM850m within 3 years.

CAPEX guidance: FY14 – RM150m, FY15 – RM150m and FY16 – RM100m. Our FY14 CAPEX forecast is higher by taking into consideration of data centre regional expansion with initial investment of ~USD10m.

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 - 28 May 2014