Highlights

The briefing was concluded on a positive note although some key takeaways were less bullish than before. We are not overly concerned and believe that data, especially from global bandwidth sales and node fiberization will continue to excel supported by the resilient data warehousing business.

Regional wholesale : Unity’s capacity is running out and waiting for next upgrade. While the total capacity from the 4 cables (Unity, APG, AAE-1 and FASTER) is sufficient for next 4-5 years, TdC do not discount the potential to participate in another 1 or 2 ASEAN cables. Will be aggressive in pre-selling the forthcoming capacity to partly self-fund those new cables. To-date, TdC has presold RM14.4m worth of bandwidth. The only negativity is APG’s RFS will be delayed for 9 months until 3Q15 due to China’s terrestrial issues.

Domestic wholesale : transforming from a star (growth driver) to a cash cow (stable) in its BCG matrix due to the global trend in consumer shift . To reduce cost, clients are more willing to downgrade to SME -grade broadband at the expense of superior service quality offered by dedicated and more expensive lease lines. As such, orders from global telcos who resell TdC bandwidth to MNCs have decreased. However, TdC remains optimistic on node fiberization demand from cellcos which provides low credit risk and long term contract.

Enterprise: expect data centre industry to consolidate over the next 4-5 years due to the oversupply situation.

SME and consumer: relatively bullish and expec ting midteens growth going forward mainly driven by own branded FTTx solutions.

CAPEX guidance: FY14 to end with more than RM200m while it is expected to peak in FY15 with circa RM400m before toning down to less than RM200m in FY16. About ⅔ is allocated to fund submarine cables.

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

• Tweaked segmental sales mix and CAPEX based on latest guidance. As a result, our FY14-16 EPS were revised downward marginally by 0.6%, 3.3% and 0.1%, respectively.

Rating

BUY , TP: RM5.73

Positives

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

Negatives

• price erosion in wholesale segment .

Valuation

• Maintain BUY despite lowering SOP-derived TP by 2.7% from RM5.89 to RM5.73 reflecting the forecast revision. For every 1% change in DiGi price, TdC fair value will change by 2 sen.

Source: Hong Leong Investment Bank Research - 27 Nov 2014