News  Telekom Malaysia (TM) has won a contract from the MCMC to develop and construct a new submarine cable system called Sistem Kabel Rakyat 1Malaysia (SKR1M).

 The new submarine cable system, which will link Peninsular Malaysia with Sabah and Sarawak, is a public private partnership (PPP) arrangement between MCMC and TM to utilise the Universal Services Provision Fund (USP).

 SKR1M, spanning approximately 3,500km, will have an initial capacity of 4 Terabit per second (Tbps) and is expected to start carrying commercial traffic by mid-2017.

 TM did not reveal the value of the contract in its announcement.

Comments  The long-awaited submarine cable contract won by TM is well within our as well as the market expectation.

 The value of the contract remains vague at this juncture given TM has yet to finalise the details of the PPP arrangement (which include the ownership of the assets as well as the ratio of the capital investment) with the authority. Nevertheless, we understand that the authority has allocated RM850m for constructing new underwater cables under the Budget 2014 but was lumped the contract to a sum of RM2.7b HSBB2 project under the Budget 2015.

 A study done by TeleGeography, a telecommunications market research firm, in the early of 2014 indicated that the cost of constructing a submarine cable could be ranging from USD28k-USD90k per kilometre, thus suggesting the SKR1M could be valued at RM343m-RM1.1b.

Outlook  The group’s broadband demand is expected to remain buoyant, despite a challenging CY15 outlook as a result of the GST implementation and the on-going subsidy rationalisation plans. The higher broadband demand is expected to be underpinned by: (i) the continuous introduction of more network convergence services, (ii) affordable broadband pricing, and (iii) raising awareness of the benefits of broadband adoption.

Forecast  We leave our FY14-FY15 earnings forecasts unchanged pending on more clarification from the management.

Rating Maintained MARKET PERFORM

Valuation  Our TM target price maintained at RM6.92, based on a targeted FY15 EV/forward EBITDA of 7.7x (+1.5 SD above its 4-year mean)

Risks to Our Call  Regulation risk and persistent margin pressure.

Source: Kenanga