Highlights

• Local daily reported that TM sought for Finance Ministry’s approval yesterday to make an RM1.8bn bid for P1, a subsidiary of Green Packet.
• P1, one of the four 2.3GHz WiMAX license holders, was the first to launch commercial WiMAX broadband service in Malaysia in August 2008. P1 has 400k subscribers translating into 34% broadband market share as at 1Q12.

Comments

• We take this news negatively as we fail to understand the rationale behind this costly acquisition. The price tag of RM1.8bn or RM2.61 per share represents a premium of 2.42 times over yesterday’s closing price of RM0.615. However, based on SK Telecom’s total investment of RM575m in P1 for a return of 28.8% stake, the firm is valued at RM2.04bn.
• Aside from TM complementing P1’s backhaul transmission, we do not foresee major operational synergy and efficiency in combining the businesses as both are operating with totally different technologies.
• To embrace fixed-mobile convergence, we think that there are better options for TM in the market, including further strengthening the tie with its sister company, Celcom Axiata.
• WiMAX technology is seen as a sunset telco standardization as the industry is moving towards 4G / LTE, especially after Taiwan, the strongest WiMAX supporting nation has decided to slowly migrate to LTE.
• Even TM has the muscle to swallow the acquisition using their cash pile, this will somehow dampen investors’ expectations of another round of special dividend by end of FY12.

Catalyst

• Earnings uplift from HSBB and ICT-BPO.
• High dividend yield.
• Improving ROE with more efficient capital structure.

Risks

• Regulatory risks, irrational competition, acceleration of global bandwidth price erosion and being a dumb pipe.

Forecasts

• Unchanged.

Rating

HOLD, TP: RM5.94

• Positives – Earnings uplift mainly from HSBB, ICT-BPO and further cash management potential.
• Negatives – Unattractive wholesale pricing could limit wholesale growth. HSBB equipment subsidy.

Valuation

• We maintain our HOLD rating on the stock with unchanged DDM-derived TP of RM5.94. The share price is likely to be under pressure due to the uncertainty of this deal as well as the residual impact on dividend payout.

Source: Hong Leong Investment Bank Research - 19 Oct 2012