Results

• 9M14 turnover of RM438m was translated into muchanticipated core net profit of RM112m, accounting for 74% and 94% of HLIB and street’s FY forecasts, respectively .
• One-off adjustment: reversal of RM11m provision made in 3Q14 pursuant to the settlement of a dispute with a supplier.

Deviations

• Higher dividend income generated from DiGi’s stake.

Dividend

• None (3Q13: none).

Highlights

QoQ: weaker top line (-3%) was mainly due to lower global bandwidth sales (GBS) and income from one-time nonrecurring contracts which amounted to RM13.6m compared to RM21.0m in 2Q14. Excluding those, revenue would have increase by 1.7% qoq on the back of higher data and data centre sales.

YoY: revenue advanced 14% thanks to contribution from data centre (+16%), GBS (none in 3Q13) and non-recurring contracts (none in 3Q13) despite voice’s contraction (-8.7%).

YTD GBS which traditionally back -loaded in 4Q, surged 218.4% yoy to RM31.2m, somewhat ahead of expectations.

TdC will look into unlocking the potential of t he combination of data centre and GBS businesses to fuel growth as well as expanding its presence regionally. Locally, TdC expects higher demand from cellcos for LTE rollouts and network modernization going well into 2015.

TdC also highlighted the potential of margin compression in FY14-15 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.

Pre-sale of submarine cable should help TdC to monetize and accelerate returns on investments.

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

• Updated model using latest DiGi DPS forecast s. As a result, our FY14-16 EPS improved by 2.7%, 2.7% and 2.4%, respectively.

Rating

BUY, TP: RM5.89

Positives

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

Negatives

• price erosion in wholesale segment .

Valuation

• Upgrade from HOLD to BUY after raising SOP-derived fair value by 15.7% from RM5.09 to RM5.89 as we rolled over to FY16, imputing new in-house DiGi TP of RM6.30 (vs. RM5.85 previously) and reflecting the upward EPS revision. For every 1% change in DiGi price, TdC fair value will change by 2 sen.

Source: Hong Leong Investment Bank Research - 26 Nov 2014