TdC is confident to outgrow the industry and set for another all-time high in FY19. All business segments are projected to grow on the back of (1) limited MSAP impact; (2) recovery of GB demand; (3) opportunities in enterprise and government sectors; (4) proliferation of data centre services; and (5) home broadband pent-up demand. Reiterate BUY with unchanged SOP-derived TP of RM10.14.

Full of optimism. In a recent closed meeting, we gathered multiple positive key takeaways which further validate our bullish call on the stock. With a more stable regulatory environment ahead, TdC is confident to sustain its double-digit growth and achieve another record breaking year in FY19.

Wholesale. While MSAP roiled the market last year, TdC has yet to experience any negative impact. There have been a lot of inbound queries from access seekers but all of them concluded based on commercial agreements. Notably, TM-Maxis is the only one which is based on MSAP principles. Global bandwidth (GB) demand has also recovered towards end of FY18 as telcos and OTTs (Google, Facebook, etc) have exhausted their own capacities and invest in alternate routes to enhance network redundancies. However, majority of GB sales are now in leasing model (2- 3 years) instead of outright IRU (15 years) and this trend is expected to continue. This is not a concern as IRU’s large but heavily discounted upfront payment will be offset by recurring and higher margin lease payments.

Enterprise. With less than 10% market share, there are a lot of rooms to gain. In order to maintain mid-teen expansion rate, TdC has streamlined its solution teams based on industry verticals to target large MNCs. It will also play an aggressive role in government sector as the latter is reviewing existing contracts for cost savings. Currently, contribution from government sector is negligible and any contract win will be a major booster to earnings.

Data centre. After an in-depth structural study by experts, 18-storey Menara AIMS’ capability to take on more loads is certified, but the power shortage issue remains. Despite that, TdC will expand up to 2 more on top of the existing 10 floors, yielding additional 10k sqft or 20% additional capacity in FY19. TdC is currently evaluating the options of renting neighbouring buildings’ power source or adding another 11kV transformer to overcome the shortage. As a risk mitigating measure, TdC hopes to secure an anchor tenant before developing the new data centre in Cyberjaya.

Retail. TdC has no plan to seek fibre access from others and will only leverage on its own asset for guaranteed quality of service. As end of FY18, it has achieved 600k premise-pass and target to cover 800k and 1m homes by end of FY19 and FY20, respectively. In response to regulator’s call for affordability, TdC had repriced all its broadband packages in Oct 2018. As a result, overall sales were stronger on the back of 40-50% surge in volume, more than sufficient to offset the ARPU erosion. We estimate that TdC has a 30-35% take up rate (180k-210k subscribers) at the end of FY18.

Forecast. Unchanged. Reiterate BUY with unchanged SOP-derived TP of RM10.14 (see Figure #1). We like TdC as its 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. IRU is no longer a drag and expected to perform better as demand recovers.

Source: Hong Leong Investment Bank Research - 19 Mar 2019