Highlights

• Growing year after year, FY16 ended with record high core earnings and there is no sign of slack. With all segments still in expansionary mode, we expect FY17 to be another all-time high with turnover and core PATAMI growing 25% and 23% respectively. TdC is our top pick in the telco universe.
• Wholesale: FY16 revenue was flat with mere 1% YoY gain due to limited capacity available for sale. With FASTER and the much delayed APG submarine cables ready for service (RFS) in Jun and Oct 2016 respectively, growth was resuscitated whereby 4Q16 was upped robustly by 24% QoQ and 28% YoY.
• Last checked, AAE-1 is on schedule and expected to be RFS by mid-17. Recall that, AAE-1 is a 25,000km-cable spanning Asia, Middle-East and Europe with access into 17 countries. Besides capacity, routes from this upcoming cable offer new opportunities to further monetize TdC?s fixed telco asset. As such, we strongly believe that wholesale will continue to chart new heights.
• Enterprise: Revenue expanded 17% YoY in FY16 primarily anchored by data centre (+24% YoY). Data in this market segment is also projected to increase healthily supported by strong demand as corporates further embrace digitalization to enhance competitive advantage and improve efficiency.
• Data Centre: AIMS had been recording uninterrupted double- digit growth since consolidation, elevating its contribution to 12% of TdC?s overall revenue. Leveraging on its state-of-the- art Menara AIMS facility in KL Centre, TdC has a niche in the market. With additional 10k sqft (+18%) floor space expansion completed in 4Q16 bringing total to 65k sqft, FY17 is geared for another solid performance.
• Retail: Remarkable growth (+70% YoY) in FY16 despite from a low base. From the existing?s 300k, it guided to add 100k premise-pass per annum going forward with a conservative adoption rate assumption of 20%, supported by undisputable high value products.

Catalysts

• Exponential global demand for high quality 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 contraction in demand for wholesale bandwidth.

Forecasts

• Maintained.

Rating

BUY ↔ , TP: RM10.28 ↔

• As more undersea cables are RFS, wholesale is poised to return with strong growth trajectory underpinning its ASEAN ambition. Retail is gaining momentum on the back of reach expansion and undisputable high value products. Also, data centre is expanding resiliently as IT outsourcing, cloud computing and virtualization gain wide adoption.

Valuation

• Reiterate BUY with unchanged SOP-derived TP of RM10.28 .

Source: Hong Leong Investment Bank Research - 10 Apr 2017