News  TM will gain between RM400m to RM600m in lease fee over the next 10 to 15 years from the TM Next-Gen Backhaul Services agreement signed with Celcom Axiata Bhd and Digi Telecommunications Sdn Bhd.

 Under the agreement, TM will provide wholesale bandwidth connectivity for aggregation and access sites jointly owned by Celcom and Digi in Peninsular.

 The tripartite agreement will support Celcom and Digi’s transmission requirements for the rollout of 4G LTE, while enabling the two companies to optimise cost and efficiently utilise TM’s infrastructure.

 The collaboration will be developed in two phases; the first phase will be over a three-year period from next year, covering 3,000km and 3,500km in Peninsular Malaysia.

Comments  We welcome the above infrastructure collaboration as the tripartite agreement will not only provide an additional revenue source for TM’s wholesale segment but will also enable the two Celcos to optimise cost and further enhance their network quality as well as capacity.

 We understand that the agreement with TM is a continuation of the existing collaboration that was signed by both Celcom and Digi in 2011 to jointly roll out more than 10k km of fibre network nationwide.

 TM’s global and wholesale business segment recorded an EBIT margin of 17.0% as of 9MFY13. By assuming a similar margin to the abovementioned agreement, we estimate that the division could enhance its segment profit by RM4.5m-RM10.2m per annum.

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

Forecast  We leave our FY13-FY14 earnings forecasts unchanged given the relatively small earnings contribution from the agreement. Meanwhile, we also introducing our FY15E earnings forecast, were we expect TM’s earnings to improve by 4.9% YoY to RM951m, underpinned by continued growth of Data and Internet Segments.

Rating Maintain OUTPERFORM

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

Risks to our call Regulation risk and persistent margin pressure.

Source: Kenanga