Results

1H14 turnover of RM287.6m was translated into muchanticipated core net profit of RM73.4m, accounting for 48.6% and 47.6% of HLIB and street’s full year forecasts, respectively.

Deviations 

Within expectation.

Dividend

None.

Highlights

QoQ: stronger top (+18%) and bottom (+49%) lines were mainly due to higher global bandwidth sales (RM19.1m in 2Q14 vs. RM0.8m in 1Q14) and income from one-time nonrecurring contracts (RM3.3m in 2Q14 vs. none in 1Q14) which both are high margin in nature.

YoY: revenue advanced 16% thanks to contribution from data (+21%) and data centre (+12%) businesses despite declining voice revenue (-8%).

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.
• Co-location, 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

HOLD, TP: RM5.09

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

Negatives – price erosion in wholesale segment.

Valuation

Downgrade from BUY to HOLD as the recent share price appreciation has reduced potential upside to our unchanged SOP-derived TP of RM4.87 (see Figure #4) to less than 10%. For every 1% change in DiGi price, TdC fair value will change by 2 sen.

Source:Hong Leong Investment Bank Research- 25 Aug 2014