The partnership and collaboration between TM, Green Packet and SK Telecom is expected to enable TM to offer a full-suite of converged communications services in Malaysia. While we are neutral on the partnership, we believe the market may have a negative knee-jerk reaction given that P1 is a loss-making company. However, we reckon it will only be fair to judge and gauge the financial impact after management unveils the details of P1’s business plan in the coming months. The investment cost of TM’s stakes in P1 appears to be at a premium, in our view, nevertheless; we believe value of P1 could be enhanced under TM leadership. The group is expected to pay a total of RM470m cash in FY14, followed by RM486m in FY15 under the above proposed Investment Agreement. There is no change to our FY14-FY15 earnings forecasts for now. We reiterate our MARKET PERFORM call on TM with an unchanged target price of RM6.00, based on a targeted FY14 EV/forward EBITDA of 6.9x (+1.0 SD).

The News. TM, through its wholly owned subsidiary, Mobikom S/B, announced an investment agreement (IA) with Green Packet (GPB) and SK Telecom (SKT) yesterday to collaborate on developing a next-generation LTE infrastructure. As part of the IA, TM initially invested RM350m and emerged as a 57% shareholder in Packet One Network S/B (P1), which is the 4G operator and service provider arm of GPB. GPB and SKT will remain as key strategic shareholders of P1 upon completion. Subsequently, TM will additionally invest up to RM210m into GPB via newly issued redeemable exchangeable bonds, which may be exchangeable for GPB’s stake in P1 in the future. Thereafter, the group will jointly invest of up to RM1.65b in convertible bonds form to fund P1’s LTE operations.

Rationale for this partnership and collaboration is to develop and offer a full-suite of converged communications services using the LTE technology platform. The agreement will establish a partnership framework for the three parties to share in the ownership and collaborate in the future growth of P1. TM would anchor the growth and development of P1’s business while SK Telecom will contribute valuable technical and strategic know-how. Green Packet, meanwhile, would ensure P1’s business continuity. The partnership will also allow TM to have an immediate access to c.2,000 WiMax sites and valuable spectrum assets in both the 2.3GHz and 2.6 GHz frequency, which in turn will allow the fixed-line giant to have a better position to negotiate with other players.

Pricing appears on the high side but… Bloomberg data indicated that acquirers are generally paying target multiplies of 1.37x for target company’s revenue and 8.92x at the EBITDA level over the past 12-month for M&A activities in the Asia-Pacific region (emerging market) telecom sector, thus suggesting that P1 could be valued at c.RM337m-RM418m range based on the respective angle. Under the above scenario, the effective investment cost of RM493m for 87% stake in P1 (assuming TM convert its RM210m exchangeable bond into P1 shares in year five and taking the coupon into consideration) may appear steep, in our view. However, given that TM has vast experience in the broadband segment; there is a likelihood that P1 could be able to enhance its value under TM control.

Proposed dividend reinvestment scheme (DRS). On a separate announcement, TM is proposing to undertake a DRS and for its 16.3 sen final dividend announced in February 2014. The new shares under the DRS will be based on an issue price of not more than 10% discount to its 5-day VWAMP or the par value. The net cash proceeds from the proposed DRS will be utilised for working capital purposes and investments of TM and its subsidiaries.

Source: Kenanga