Highlights

• TdC has, on 10 April 2015, disposed of 49.9m DiGi shares, (circa 0.64% of the issued and paid-up capital of DiGi) through private placement via a book building process to eligible institutional / sophisticated investors and satisfied entirely by cash.

• DiGi shares were transacted at RM6.23 per unit and raised gross proceeds of circa RM310.9m.

• TdC will realize a fair value gain from available-for-sale reserve equity account to profit and loss of RM202.1m arising from the disposal based on the acquisition cost of RM2.49 per share in 2008.

• TdC rationalized this deal by identifying DiGi shares as noncore investment and the disposal would allow TdC to reallocate capital resources for working capital purposes.

• Separately, TdC proposed to undertake a grant of a share option to the CEO, to subscribe for up to 17.2m new TdC shares (circa 3% of the existing issued and paid-up share capital of TdC) over evenly 5 years based on 10% discount to the 5-day VWAP immediately preceding the granted date.

• This is to motivate the CEO towards better performance and loyalty beside as a reward for his past contribution.

Comments

• The disposal price is fair compared to our in-house fair value of RM6.30 (-1.1%).

• This comes as a positive surprise. Since CAPEX for all new submarine cables are already provided for, this new fundraising inevitably lead us to speculate M&A may be in works. Recall that TdC has been planning for regional expansions for the past years, especially in data centre business.

• To forgo steady dividend income, the new venture should return a higher yield than 4.2% per annum.

Catalysts

• Exponential global demand for data bandwidth.

• 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

• Incorporated this share sale into the model which resulted in downward revision of FY15-16 EPS by 12.1% and 2.2%, respectively. This is mainly due to lower dividend income in line with reduced stake in DiGi.Com.

Rating

BUY , TP: RM6.78

Positives

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

Negatives

• price erosion in wholesale segment.

Valuation

• Maintain BUY after raising our SOP-derived TP by 10.6% from RM6.13 to RM6.78 (see Figure #1) as TG of telco businesses was raised from 2.5% to 3.5% while WACC was unchanged at 9.6%.

Source: Hong Leong Investment Bank Research - 13 Apr 2015