News  Telekom Malaysia (TM) yesterday launched three initiatives – My1Hub, Cahaya Malaysia submarine cable system and Iskandar International Gateway (IIGW) – which will facilitate Malaysia’s aspirations to be a regional communications hub.

 My1Hub serves as a single point providing seamless connectivity from five nodes in Peninsular Malaysia to domestic and international gateways via TM’s cable landing stations and cable systems.

 Cahaya Malaysia submarine cable systems network, which construction began in 2011 could provides 560 Gbps connectivity between Malaysia, Japan and Hong Kong, is the company’s first privately-owned system and spans distance of over 6,800km.

 The third initiative, IIGW, has been established in Nusajaya to serve traffic demand for the southern region. It connects Nusajaya directly to TM’s four cable landing stations, giving the shortest distance connectivity to international hubs in London, Hong Kong, and Singapore. It has a speed of up to 10Gbps.

 No investments costs were disclosed but these new initiatives could run into billions of ringgit.

 On the 2nd phase of the high-speed broadband (HSBB2) project announced in the 2014 budget, TM said an additional 95 urban and 400 suburban exchanges will be converted. The numbers are on top of the 103 exchanges that have been converted to the next generation network as of yesterday.

Comments  The three initiatives are no surprise to us as we had previously highlighted that TM will be the frontrunner to implement the HSBB2 plan under the budget 2014. We reiterated our view that any potential government grant (from the HSBB2), which implied capex saving, could potentially lead TM to reward shareholders in the future. Meanwhile, the initiative could also see TM further expanding its HSBB footprint nationwide and provide a growth driver to its retail and wholesale business segments going forward.

 We understand that the landing of Cahaya Malaysia in Hong Kong forms the backbone in linking TM’s VADS Data Centre Hong Kong to the rest of the world. It will further strengthen TM’s ever growing ICT and Business Process Outsourcing (BPO) footprint outside Malaysia and supporting Malaysia’s aspiration to become the regional data centre hub by 2015.

Outlook  TM’s outlook remains solid despite escalating competition in its home broadband segment.

Forecast  No changes in our FY13-FY14 earnings forecasts.

Rating    Maintain OUTPERFORM

Valuation  Maintaining our Target Price at RM5.94 based on a targeted FY14 EV/forward EBITDA of 6.7x (+0.5 SD).

Risks to our Call  Regulation risk and persistent margin pressure. 

Source: Kenanga