Management’s  outlook  bore  a  cautious  tone  due  to  heightened competition from TM lately, which has led to noticeable price erosion in the  wholesale  segment.  With  this,  coupled  with  an  oversupply  of  data centre  space  in  Cyberjaya,  we  believe  TDC  lacks  catalysts.  We  tweak our  FV  higher  to  MYR3.95  (from  MYR3.80)  on  imputing  higher  EBITDA margins due to opex efficiency gains in 1HFY13.

   Cautious outlook. Management cautioned that competition in domestic wholesale  has  turned  aggressive  in  the  last  few  months  as  the incumbent,  Telekom  Malaysia  (TM)  (TM  MK,  NEUTRAL,  FV:  MYR5.30) has begun to react to protect its market share. As a result, Management has  been  seeing  noticeable  price  erosion,  which  may  negatively  affect new contracts or renewals. But Management believes it is still possible to grow  revenue  by  15-17%  in  FY14  (RHB  estimate:  +17%).  However, prolonged intense competition may pose a risk to our FY14 estimates. 

 
  Data centre oversupply. We understand from Management that there is an  oversupply  of  data  centre  space  at  its  new  11,000  sq  ft  facility  in Cyberjaya,  which  is  a  negative.  The  upfront  rental  costs  paid  and  a slower-than-expected  take-up  may  imply  that  earnings  growth  from  the data centre would require more time to gain traction.

  Thailand a good fit for M&A. Management indicated that pursuing M&A opportunities  in  Thailand  may  be  a  good  fit  for  its  regional  ambitions. Having a foothold in Thailand will allow TDC to fully utilise capacity from the Asia Pacific Gateway (APG), which is on track for completion by end-2014.  

  Risks.  Key  risks  include:  i)  sharper-than-expected  decline  in international bandwidth prices; and ii) stiffer competition domestically.

  Forecasts.  We  raise  our  FY13-14  earnings  forecasts  by  5-22%  after incorporating higher EBITDA margins due to opex efficiencies.  

  Investment  case.  Maintain  NEUTRAL  on  TDC,  with  a  higher  FV  of MYR3.95 (previously MYR3.80) after revising our earnings forecasts. We believe  the  stock  is  already  fairly  valued  without  an  M&A  to  establish  a regional  presence.  Also,  25%  of  its  SOP-based  valuation  is  attributable to  Digi.com  (DIGI  MK;  SELL,  FV:  MYR4.10),  which  we  think  lacks catalysts, barring the setting up of a business trust.

Source: RHB