Highlights

Announced that its wholly-owned subsidiary, Global Transit 2 Limited (GT2L), has entered into a Joint Build Agreement, Supply Contract and other related agreements for the construction and maintenance of the FASTER cable system.

The consortium consists of 5 other members namely China Telecom, Google, KDDI, China Mobile and SingTel.

FASTER will take the route between North America (Los Angeles, San Francisco, Portland and Seatle) and Japan (Chikura and Shima) which is expected to commence construction immediately and is targeted for completion in 2016 or early 2017.

GT2L will secure 1 out of 6 dedicated fibre pairs, capable of carrying 10Tbps of capacity powered by 100Gbps technology.

This investment is to support TdC’s Asia-World-Asia strategy along with Unity, APG and AAE-1 cables. Although this route is already served by Unity, additional capacity is required to support growth and in particular intra-Asia capacity, that TdC will have when the APG is completed, to North America.

Financial Impact

Gross investment of ~USD56m (RM179.1m) to be funded by internally generated funds and borrowings, if required.

No concern of funding as TdC has RM236.8m of cash as of 1Q14 while this can partly be self-funded depending on TdC’s ability to pre-sell its capacity entitlements.

Comments

A positive development as this will further complement existing assets in terms of capacity with latest technology yielding lower cost per unit.

Execution risk is expected to be minimal as the consortium is made up of heavyweights and to be supplied by NEC, one of the world’s top vendor of submarine cable with 30 years of experience in constructing over 200,000km of cables.

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: RM5.09

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

Negatives – price erosion in wholesale segment.

Valuation

Reiterate BUY call with a higher TP of RM5.09, +4.5% from previous TP of RM4.87 (see Figure #4) to reflect our new fair value for DiGi (from RM4.94 to RM5.85). For every 1% change in DiGi price, TdC fair value will change by 2 sen.

Source:Hong Leong Investment Bank Research- 12 Aug 2014