Telekom Malaysia; Fully Valued; RM6.20
Price Target: RM4.75; T MK

Trading on Telekom Malaysia (TM) is to be suspended today at 9am pending a material announcement, whereby TM is intending on ‘entering into a transaction’ as listed on Bursa Malaysia. There is strong likelihood this involves a deal for TM to purchase either a stake in or to acquire Green Packet Berhad’s Packet One (P1) assets. Incidentally, Green Packet also applied for a trading suspension the same day. This follows a local Malaysian telecom blog reporting of a media invite issued by Telekom Malaysia for the signing of a milestone agreement with industry players involved in wireless technologies. A local news daily also reported that TM succeeded in bidding for a stake in P1.

P1 is currently a 57% owned subsidiary of Green Packet Bhd, with SK Telecom a strategic partner with a 26% stake. The company is primarily involved in fixed wireless telecommunications through its P1 WiMax brand, and has also dabbled in fibre and mobile wireless offerings to complement its existing products. It had 449k broadband subscriptions as at 4Q13, though still remained loss-making in 2013. We think the value of P1 to TM lies more in the former’s 20MHz of TDD LTE spectrum (on the 2600MHz band), 30MHz of WiMax spectrum (on the 2300MHz band) and its tower infrastructure, which amounts to 1,908 base stations. Given the operator is also planning on migrating its WiMaX footprint to LTE, spectrum on the 2300MHz band could also be refarmed. TM was reported to be expecting more than 1m LTE subscriptions by 2017.

We are cautiously optimistic with regards to TM’s potential acquisition of P1, as there has been little confirmation of the price tag of P1’s assets or terms of the agreement. Early speculation is that TM would be spending more than RM2bn for the stake. At this price tag, TM would likely need to gear up from its current 1x net debt-to-EBITDA (as at 4Q13) to c.1.5x-1.6x FY14F EBITDA if completely funding this through debt. The operator may also need to absorb the losses from P1’s broadband segment (due to high depreciation) – operational losses for its broadband platform was RM116m for FY13. Maintain FULLY VALUED with RM4.75 TP, pending further details of this transaction. 

Source: HwangDBS Research - 27 Mar 2014