We think if any regional expansion were to take place, management may likely begin in Thailand where demand for data is very strong in a growth cycle that could still be in its infancy. This, we believe, will tie in very nicely with the upcoming APG cable due for completion by end-2014. Maintain BUY with revised fair value of MYR5.55 (previously MYR4.95) after rolling over our valuations to FY14.

- What form of regional expansion? We think if any regional expansion were to take place, management may likely begin in Thailand where demand for data is very strong in a growth cycle that could still be in its infancy. The key reason for this, we believe, is that Thailand has been very late in introducing 3G services, since interim 3G services were only offered as late as 3Q11 while the 3G licences (based on the 2100Mhz spectrum) were officially issued only in Dec 2012.

Management had recently alluded that it has regional expansion initiatives planned, and hinted it may be done inorganically. Among the countries identified by management apart from Thailand were Indonesia, Vietnam, Singapore and Philippines. With an undergeared balance sheet, we believe funding is not an issue.

- In preparation for the Asia Pacific Gateway (APG) cable? By having a foothold in Thailand, we think this would be a good strategic decision to fully utilise the APG’s capacity by tapping into regional bandwidth demand from Thailand and Indo-China.

To recap, TdC is estimated to have a 6% stake in the APG cable which connects Malaysia directly to Korea and Japan. With that stake, TdC is estimated to have an initial capacity of about 3.4Tbps for sale upon APG’s completion by end-2014. 

- Investment case. Maintain BUY on TdC with revised fair value of MYR5.55 (previously MYR4.95) after rolling over our valuations to FY14 and a target PER multiple of 14x to TdC’s core (excluding DiGi’s dividends) FY14 EPS of 20.1 sen plus the value of the current 275m DiGi shares held (valued at MYR5.10/share). We like TdC for its high earnings growth potential against a backdrop of increasing demand for regional bandwidth in Asia Pacific.

Source: RHB