TIMECOM is well positioned to capitalize on soaring internet traffic and data transmission driven by new AI data centers (DC) in Malaysia. We expect robust demand for TIMECOM's global and terrestrial bandwidth services, supported by its extensive network of submarine cables and fiber optics. Additionally, TIMECOM's associate AIMS, is expanding DC capacity to new ASEAN markets, enabling it to ride on the region's thriving co-location market, especially amid tighter regulations on local data storage and residency. The icing on the cake is higher demand for cloud services by local enterprises undergoing digital transformation, benefitting TIMECOM as one of the largest providers. We initiate coverage with an OUTPERFORM rating and TP of RM5.91.

Proxy to surge in data bandwidth demand. Internet traffic is soaring due to 5G adoption and traction in online activities (e.g. streaming, social media, online gaming, remote working, and e-commerce). Looking ahead, we believe generative AI (Gen AI) will drive the next stage of growth. Enterprises are amassing vast volumes of data for AI model training and inference. These data sets are hosted in DCs that are rapidly proliferating in Malaysia. According to DCByte, DC capacity in Malaysia is forecast to surge 11-fold from 280MW in 1QCY24 to more than 3.2GW by 2028. Against this influx of DCs and internet traffic, we expect demand to accelerate for TIMECOM's global and terrestrial bandwidth services. Its extensive network of fiber optics and submarine cables facilitate the transmission of data between DCs and end-users.

Leveraged to promising DC co-location market in ASEAN. We expect its 30%-owned AIMS, which owns and operates DCs, to expedite its expansion in SEA, backed by the financial clout and track record of its parent, Digital Bridge Group. Demand for DC co-location (Co-Lo) services in Southeast Asia (SEA) is set to ramp up given the trends above. Moreover, new regulations mandating local data storage and residency have emerged in ASEAN. This includes the Personal Data Protection Act 2022 (Thailand), Risk Management in Technology 2020 (Malaysia), and Law on Cybersecurity 2022 (Vietnam). The Co-Lo market in major ASEAN markets are expected to expand at CAGR of 15%-28% in 2023-29. Moreover, newbuild DCs are in demand to run AI workloads and offer GPU-as-a-service.

Expect robust growth for cloud services. Organizations in Malaysia must comply with local data protection and sovereignty regulations. This would drive demand for cloud storage and solutions from local cloud service providers (CSP), including TIMECOM, one of the largest domestic CSPs. As a result, Malaysia's public cloud market is projected to reach USD5b in 2029, implying a CAGR of 22% in 2023-29. Against this backdrop, we forecast revenue growth of 2%-9% for TIMECOM's cloud segment in FY24-FY25, which accounts for 11% of 9MFY24 topline. TIMECOM holds a competitive edge over smaller players by offering end-to-end solutions integrated with its existing infrastructure (i.e. submarine cables, fiber optics trunk, landing stations and DCs).

Initiate with OUTPERFORM. We initiate coverage on TIMECOM with an OUTPERFORM call and TP of RM5.91 based on 12.5x FY25F EV/EBITDA. Our valuation implies: (i) modest premium to its historical average of 12.2x, (ii) 18% discount to Singtel (15.2x): accounting for TIMECOM's smaller market cap, and (iii) a premium to our 7.0x target multiple for TM, reflecting TIMECOM's regional DC exposure, higher EBITDA margins and lower regulatory risk on retail broadband given its smaller market share.

COMPANY OVERVIEW Comprehensive data services for broad range of customers. TIMECOM is a telco service provider, with the following core businesses: (i) retail fixed broadband in Malaysia, (ii) global and domestic wholesale bandwidth capacity, (iii) cloud computing, managed services and security solutions for enterprises (refer to Appendix I), and (iv) data center (DC) colocation services. In addition, TIMECOM has exposure in the renewable energy sector via: (i) Time Charge N Go, an electric vehicle (EV) solutions provider and charge point operator, and (ii) Emit Solar, a solar energy company that provides development, installation and maintenance of solar photovoltaic systems.

Primarily a bandwidth provider. In a nutshell, TIMECOM is primarily in the business of providing data bandwidth services to a diverse customer base, comprising: (i) retail: subscribers for its domestic residential fixed broadband plans, (ii) enterprise: government agencies, corporates (eg. financial institutions), and (iii) wholesale: e.g. mobile carriers, hyperscalers, international content providers and over-the-top (OTT) platforms. In 9MFY24, the bulk (86%) of its revenue emanated from recurring data services, followed by cloud (11%), and the balance (3%) from voice and other services.

Data center associate is an emerging gem. In 9MFY24,11% of its core earnings were derived from associate contributions, that was evenly distributed between its key associates (refer to Exhibit 1) that include: (i) AIMS Data Center Holdings Sdn Bhd (AIMS), (ii) CMC Telecommunications Infrastructure Corporation (CMC), and (iii) Symphony Communications Public Company Limited (SYMC).

AIMS operates DCs with total net lettable area of 130,480 sq ft in Malaysia and Thailand. Its flagship DC at Menara AIMS anchors the Malaysia Internet Exchange (MYIX). To recap, in Apr 2023, TIMECOM disposed its 70%-interest in AIMS to Digital Bridge Group, Inc. (DBG). DBG is one of the largest global asset managers, primarily focused on digital infrastructure investments.

Provider of DC, cloud, digital infrastructure, and information security services.

Provider of data connectivity, DC co- location, cloud & security services, and ICT solutions. Listed on the Thailand stock exchange.

Key Backed by valuable global and domestic fiber assets. TIMECOM's key telco infrastructure assets include: (i) fibre optics network in Peninsula Malaysia and ASEAN countries (Singapore, Thailand, Vietnam and Cambodia), (ii) stakes in international subsea cable systems (refer to Appendix II) spanning a total distance of 76,350km: UNITY, FASTER, Asia Pacific Gateway (APG) and Asia-Africa-Europe-1 (AAE1), and (iii) submarine cable landings for APG (Pahang) and AAE1 (Penang).

The Cross Peninsular Cable System (CPCS) is TIME's flagship trunk network at Peninsular Malaysia, which spans over 3,500 km of terrestrial and submarine fibre optic cables. It has landing points around the perimeter of Peninsula Malaysia with two international gateway points from Thailand to Singapore.

Competitive retail offerings. In comparison to its peers, we believe that TIMECOM's current retail broadband plans are competitively priced (refer to Exhibit 2). We zoom in on the entry level packages, given our understanding that it comprises the largest share of subscriptions for home broadband plans in Malaysia. In particular, its 600Mbps plan is priced at RM139 in comparison to its peers that charge RM149-RM159 for lower speeds of 500Mbps. On the back of this, we expect steady growth for its retail business, with minimal customer churn. Furthermore, we anticipate steady growth for TIMECOM's subscriber base moving forward, given that the nationwide penetration rate for broadband in Malaysian households remains low at 47% currently.

This is in comparison to other SEA nations, namely Singapore (97%), Thailand (90%) and Vietnam (65%).

We estimate that TIMECOM has over 1.67m fiber home passes with a total subscriber base (including non-household accounts) of 600k, translating to 13% market share. We understand that TIMECOM primarily focuses on providing fiber broadband to high-rise residential (e.g. condominiums and apartments) and commercial buildings, particularly in urban and suburban areas. We consider this commercially driven approach as advantageous, given better economics of scale compared to covering landed residential areas with lower population density.

INVESTMENT MERITS 1. Capitalizing on Surge in Internet Bandwidth Demand from AI Data Centers No end to internet traffic growth. Daily internet traffic continues to soar on the back of: (i) 5G adoption by smartphones, (ii) proliferation of internet-connected and IoT (internet-of-things) devices (e.g. security cameras, drones, smartwatches), and (iii) sustained traction in online activities (e.g. streaming, social media, online gaming, remote working, e-commerce, digital banking).

Against this backdrop, MYIX reported that internet bandwidth demand reached a new high of 2.3 Tbps in 2023, a 20% increase from its previous peak of 1.94 Tbps in 2022. In addition, according to Telegeography, global aggregate bandwidth demand more than tripled in 2019-23 to reach an eye-popping 5 Pbps (refer Exhibit 3). In particular, the growth was driven by Africa and Asia, with CAGR of close to 40%-50% in 2019-2023 (refer Exhibit 4). Meanwhile, Ericsson expects global mobile data traffic to grow at robust CAGR of 20% until 2029, driven by 5G.

Generative AI will power next growth phase. Moving forward, we believe the vast availability of generative artificial intelligence (Gen AI) tools on the cloud will catalyse the next stage of growth for internet traffic. For instance, Amazon Sagemaker and Microsoft Azure Machine Learning are cloud platforms that offer two options for users: (i) build foundation models (FM) from scratch, or (ii) customize FM models by integrating their data lakes with existing FMs from various AI providers (e.g. OpenAI, Codex, DALL-E, Anthropic, Meta). These models enable enterprises to run Gen AI workloads for data analytics, enhance productivity, and create new content (e.g. images, videos, music, stories). Malaysian enterprises such as Petronas, Deriv, Prudential Malaysia and Datapel Systems are currently utilizing Gen AI-powered cloud services. As a result, enterprises are amassing and archiving vast volumes of data, hosted on AI servers within DCs, for FM training and inference. On the back of this, JLL estimates that total global storage capacity in DCs and end-point devices will grow by 18.5% CAGR in 2023-27F, more than doubling from 10.1ZB to 21.0ZB.

Source: Kenanga Research - 18 Dec 2024