Highlights

• In its exchange filing, TM announced that it was awarded a landmark contract via an open tender to develop and contruct a new submarine cable system, called Sistem Kabel Rakyat 1Malaysia (SKR1M) by MCMC to link Peninsular Malaysia with Sabah and Sarawak.

• This cable will span approximately 3,500km with an initial capacity of 4Tbps based on the 100Gps technology and upgradable in future. It is expected to start carrying commercial traffic by mid-2017.

• SKR1M is part of government’s initiatives to increase the capacity of high speed broadband, as outlined in Budget 2014 and 2015.

• The project will be established through a Public -Public Partnership (PPP) arrangement between MCMC and TM utilizing Universal Services Provision Fund (USP), which is under the purview of MCMC.

• With this partnership, TM as nation’s broadband champion will be able to expand its service coverage as well as its connectivity domestically to meet the industry’s ever-growing demands for IP applications. This in turn will support future HSBB deployment, thus bridging the digital divide. Financial Impact

• No concern in funding for this project as RM850m was allocated for this project by MCMC according to Budget 2014. This translates into USD18.4k per km per Tbps (see Figure #1), sufficient to cover the cost of the whole cable.

Comments

• A much anticipated positive development as TM has always been favored to clinch this deal as highlighted in our Budget 2014 report dated 28 Oct 2013 and reiterated in Budget 2015 report dated 13 Oct 2014.

• With this cable, Sabah and Sarawak networks would improve significantly connecting to Peninsular which acts as the major international gateway for Malaysia. This would also spur more ICT investments in Sabah and Sarawak, including 4G LTE, FTTx, cloud computing, etc.

Catalyst

• Earnings uplift from HSBB and ICT -BPO.

• LTE node fiberization.

Risks

• Prolonged drag by P1, appreciation of USD, regulatory risks, irrational competition and acceleration of global bandwidth price erosion.

Forecasts

• Unchanged.

Rating

HOLD , TP: RM6.87

Positives

• Earnings uplift mainly from HSBB, ICT -BPO andfurther cash management potential, near monopoly of fixed telco market in Malaysia.

Negatives

• Unattractive pricing could limit wholesale growth.HSBB equipment subsidy.

Valuation

Reiterate HOLD with unchanged DDM-derived fair value of RM6.87 using WACC of 5.7% and TG of 0.5%.

Source: Hong Leong Investment Bank Research - 31 Dec 2014