Telekom Malaysia (TM) and UEM Sunrise will jointly undertake a mixed development project on TM’s office site in Kuala Lumpur. The project is expected to be completed by year 2022 with gross development value set to be announced at the later stage. There is no change to our earnings forecasts for now, pending more details of the project. We maintain our OUTPERFORM call on TM with an unchanged target price of RM7.20, based on targeted FY17E EV/forward EBITDA of 7.8x, representing +1.0x SD above its 4-year mean. We like TM for: (i) less competition in its fixedline broadband business, (ii) its inroad to become a convergence champion, and (iii) more traction from the HSBB2 and SUBB projects.

Joint land development (JLD)… TM has entered into a joint land development agreement with UEM Sunrise Berhad (UEMS) and its whollyowned subsidiary Sunrise Quality Sdn Bhd (SQSB), for the development of two pieces of freehold land in Bukit Mahkamah, a strategic land located in Kuala Lumpur within walking distance from Menara Maybank, Bursa Malaysia building and Menara Olympia. The lands are currently occupied by TM as parking lot and office premises (which comprised of an 11-storey office building together with 2 storeys Annexe building which is approximately 40 years old). TM has received a guarantee land cost of RM150m (payment staggered over 1 year from unconditional date) and a 5% of the Agreed gross development value (GDV). The JLD agreement shall be subject to and conditional upon the fulfilment of all the conditions precedent within 2 years from the commencement date. (Please refer to the overleaf for details).

….to undertake the mixed projects, comprising residential and/or commercial development. UEMS is set to develop service apartments and retail elements on these freehold lands measuring approximately 1.69 acres in total. The project is expected to span over a period of six years. While the Agreed GDV has yet to be determined (as it is still pending securing the development order approval and mutual agreement of the parties in accordance with the terms of the JLD agreement), our property analyst has estimated that the value could potentially hit RM1.0b, assuming that land cost makes up 15% of the GDV.

A fair deal. The guarantee land cost of RM150m offered by UEMS appeared fair in view that the land open market value for commercial use was valued at RM147.2m to RM150m range based on independent valuers’ estimation as at December 2014.

Rationale of the proposed JLD. The deal will enable TM’s Bukit Mahkamah Land value to be unlocked and maximized by way of a mixed development. The proceeds from the deal will be used for the reallocation of TM employees and business operations from the site, as well as for future capex and working capital purposes. It could, to a certain extent, relieve TM’s heavy capex load, as it set to spend 25%-30% (implying a targeted capex of c.RM3.0b-RM3.6b) of revenue as capex in FY16.

A handsome gain. As at the end CY15, the net book value of the Bukit Mahkamah land stands at c.RM35.9m and is free from encumbrances. With a guarantee land cost of RM150m provided by UEMS coupled with a 5% (or RM50m based on our estimated GDV of RM1.0b) of the Agreed GDV, we believe TM could pocket RM164.1m (or 4.4 sen EPS) net gain from the deal. For illustration purpose, assuming the entire transaction is completed by end FY16, TM’s FY16 net profit could be enhanced by 2.3% to RM923m, after netting off 25% corporate tax and spread out the gain over the development year. We will build in the amount to our financial model once the details are finalised.

Source: Kenanga Research - 30 May 2016