We call a “Trading Buy” on TIMECOM with a DCF-driven FV of RM14.00 (WACC: 7.3%, TG: 1.5%).Our call is meritedbyTIMECOM’s: (i) resilientand lean business model; (ii) growth prospectshelmed by increasing demand for internet and data services; and (iii) growing regional synergies via associates. We alsobelieve TIMECOMwillnot lose out from the eventual deployment of our national 5G but is likely limited to only the rolling out of infrastructure.

High recurring income cements resiliency. TIMECOM’s revenue stream is almost entirely recurring, from their provision of data (i.e. fibre internet, data centre space) and voice services. In FY20, management aims to enter at least 1m retail/household premises (from 790k in FY19, although this might be deterred by the MCO) with a fibre broadband footprint mostly encompassing high rise buildings in the Klang Valley and Penang. Presently, TIMECOM household packages are the most competitive in the market based on the respective speeds offered which we believe gives existing customers little incentive for migration. This puts the group in a favourable position during this MCO period where homebound work arrangements is more prevalent and the need for home internet becomes more pressing, possibly nudging ARPU higher.

More data needs more data centres. The group also holds a strong presence in hosting data centres, where prospects are helmed by the increase in dependency of cloud computing and data storage outsourcing becoming commonplace and cost efficient for corporations. Hence, we opine the segment could face little resistance for growth plus the lack of large-scale competition locally. By end-FY20, a new Cyberjaya site would add 10k sqft of net lettable area (+13% from an existing 78.2k sq ft locally), which we understand is scalable when capacity becomes utilised.

Tapping into the broader ASEAN market. The group has entered into strategic partnerships with CMC Telecom from Vietnam and Symphony Communication and KIRZ Holdings, Thailand. With this, the group gains land access into other neighbouring ASEAN countries which are seeing an expanding data centre market. At the same time, this provide a gateway to the group’s submarine cables (AAE-1, APG, FASTER, Unity/EAC-Pacific, SKRIM) for the benefit of larger hyperscale tech companies. As of 1HFY20, associates contributed RM8.5m (+21% YoY) to profits.

Steady revenue complimented by healthy margins. For FY20E/FY21E, we pencil in a 10%/9% revenue growth on better data demand, slightly offsetted by the diminishing use of voice services for communication. EBITDA margins of c.45% (vs other operators at c.40%) could be sustained by leaner fixed cost management which we believe should translate to net earnings growth of 5%/9%. Estimating payouts to remain above 50% (more than the established 25%), dividend yields could translate to 2.5%/2.7%.

“Trading Buy” with a FV of RM14.00. Our target price is DCF-derived with an assumed WACC of 7.3% and TG of 1.5%. This also implies an EV/Fwd EBITDA of 14.0x (close to the stock’s 5-year mean) which is a premium from the peer average of 9.0x. As mentioned above, we anticipate little factors that could cause customers to deviate away from the TIMECOM brand, with its almost entirely recurring income mix to boast its sustainable business model. Meanwhile, other spaces (i.e. mobile) are only experiencing heightening competition which threatens earnings. The group also is the only large cap telco with a net cash position (RM420.3m per 2QFY20 results). While we do not anticipate the group to be a key participant in future nationwide 5G plans, it could still meaningfully contribute in fiberising our national network.

Source: Kenanga Research - 15 Sept 2020