Time dotCom (TDC) announced yesterday that its newly-acquired subsidiaries, Global Transit Communication SB and Global Transit Ltd, had entered into an agreement to construct and maintain a new submarine cable system called the Asia Pacific Gateway (APG).

Second major endeavour after Unity Cable. The MNCs in the consortium are China Mobile, China Telecom, China Unicom, Chunghwa Telecom, Facebook, KT Corp, LG Uplus, NTT Communications, StarHub, Viettel as well as Vietnam Posts and Telecommunications Group. This marks the two Global Transit companies' second most significant effort after co-constructing 10%-owned Unity Cable System in 2008. Our back-of-the-envelope calculation suggests that the whole entire project would cost a staggering USD726m (RM2.3bn), as TDC is looking to invest some USD45m (RM142m) in return for 6.2% ownership in APG. The total design capacity of APG is up to 54.8Tbps via the adoption of 40Gbps optical transmission technology (TDC will possess up to 3.4Tbps). In the near future, as demand for data outpaces supply, TDC along with other consortium members can upgrade their optical transmission cards from 40Gbps to 100Gbps, thus boosting APG's total capacity to 137Tbps (TDC's portion is up to 8.5Tbps). Construction of the submarine cable system is expected to commence in 2HFY12 for completion in FY14.

Reducing its dependence on Singapore. With the inclusion of APG, TDC will now have a direct point-of-presence in Korea and Japan, with branch networks in Mainland China, Hong Kong, Singapore, Taiwan and Vietnam. We are positive on this strategic investment, as TDC would soon have international capacity at asset owner prices, without relying heavily on Singapore as the primary route to global international hubs. We believe with APG being part of TDC's enlarged submarine cable portfolio, the company would be able to chalk up better profit margins going forward. Also, Indochina's broadband penetration of less than 10% suggests that there is good upside potential for TDC, as the enlarged entity would have access to an expansive regional fiber footprint extending from Asia to the US.

Maintain BUY at FV of RM4.40. Based on its 1QFY12 financial results, TDC as a standalone entity is debt-free, and even with the completion and inclusion of the three recently acquired companies in 2QFY12, we believe the enlarged TDC group should still comfortably sit on an estimated net cash pile of RM250m in FY13. Thus, being part of this consortium may not require TDC to gear up its balance sheet. Overall, we are retaining our forecasts for now, since positive financial contribution may only be felt from FY14 onwards. Hence, we are maintaining our BUY recommendation on TDC, with a SOP valuation of RM4.40, for a 26% potential upside.

Source: OSK