Highlights

We left the briefing feeling positive and continue to like its prospect. Although some of the key takeaways were less bullish than before, we are not overly concern and believe that there are more synergies which can be extracted from the recent acquisitions.

Domestic fixed line: participated in tenders coming from North Asia and expect to secure at least one or two significant contracts. Continue to feel irrational pricing pressure from the incumbent TM but remains committed to 15%-17% growth rate over the long term.

Data Centre: oversupply in Cyberjaya has led to fierce competition and margin erosion. Although TdC has exposure in Cyberjaya (11k sqft), we do not expect the glut to derail its growth as majority of its capacity (82%) is strategically located in KL (50k sqft). Furthermore, AIMS Cyberjaya is complementary, enabling TdC to retain existing customers (who are price sensitive and has business niche) by migrating them from KL. TdC has secured the master tenancy of Menara Aik Hua from PNB, granting flexibility in its future expansions. However, TdC shared that it is currently not pursuing managed services (outsourcing).

Wholesale: sales volume still outpacing price erosion, which also partly thanks to technology advancement bringing down the per unit bandwidth cost.

For regional expansions, TdC expressed interest in Thailand due to its solid footprint. To date, TdC has captured up to 50% market share of the cross border connectivity. Nonetheless, TdC does not discount going into other markets, including Indonesia.

Comments

In view of the commencement of EIR (Equipment Identity Register) by year end, AIMS Group, who is currently hosting the MNP (Mobile Number Portability) solution, is in good position and has an edge over peers to win this contract.

Catalysts

New acquisitions, when integrated as a group, will further enhance earnings due to volume synergies and the utilization of assets at owner-cost prices.

Exponential global demand for data bandwidth with quality.

Risks

Irrational wholesale pricing and competition, regulatory risks and contraction in demand for wholesale bandwidth.

Forecasts

Updated model to reflect improved gross margins, CAPEX assumptions, investment income and imputed high margin non-recurring contract revenue. In turn, FY13 EPS was raised by 8.5% while FY14-15 EPS were lowered by 3.9% and 6.1% respectively mainly due to lower dividend income due to lower stake after dividend-in-specie of DiGi shares.

Rating

BUY, TP: RM3.99

Positives - Tapping into new growth areas such as global bandwidth and node fiberisation as well as entering a series of synergistic acquisitions.

Negatives – price erosion in wholesale segment.

Valuation

Reiterate our BUY call based on unchanged SOP TP of RM3.99 (see Figure #3). The fair value of TdC’s DiGi stake remained unchanged at RM4.79 per share. For every 1% change in DiGi price, TdC TP will change by 2 sen.

Source: Hong Leong Investment Bank Research - 26 Aug 2013