Our channel checks indicate that TM may acquire a 30% stake in P1 for its spectrum. Valuations remain unclear for now. We would view such a move  as  mildly  positive  to  TM  since  this  gives  it  the  opportunity  to complement  its  fixed  broadband  services  with  a  wireless  platform. However,  this  could  mean  a  rise  in  capex,  which  would  then  reduce TM’s capital management prospects. Maintain NEUTRAL.

- TM’s  wireless  ambitions  closer  to  reality?  Our  channel  checks indicate  that  TM  may  possibly  acquire  a  30%  stake  in  a  subsidiary  of Green Packet. We suspect this subsidiary may be Green Packet’s 55%-owned Packet One Networks SB (P1), which holds 30Mhz of the 2.3Ghz spectrum  that  is currently  used  to  roll  out  P1’s WiMAX  broadband services.  Note  that  P1  also  holds  20Mhz  of  the  2.6Ghz  spectrum (awarded in Dec 2012) meant for LTE services.

- Mildly  positive  if  not  too  pricey.  We view TM’s rumoured  30%  stake acquisition  in  P1  as  mildly  positive  to  TM  as having access to P1’s spectrum will allow the latter to complement its fixed broadband services with  a  wireless  platform.  Our  view  is  based  on  the  assumption  that  TM does not overpay for the P1 stake (amount unknown). While we believe that  wireless  broadband  solutions  would  not  become  TM’s key  revenue growth  driver,  offering  more  holistic  broadband  services  could  enhance TM’s market potential while also reducing churn. However, the potential of higher capex may dim the prospects of special dividends from TM.

- P1’s  valuation.  As  P1  is  still  loss-making,  it  is  difficult  to  make  a  fair assessment  of  its  valuation.  That  said,  note  that  SK  Telecom  paid USD100m (MYR325m) for a 25.8% stake in P1 back in June 2010. This implies  that  a  30%  stake  in  P1  could  cost  TM  USD116m  (MYR377m). However,  TM  may  have  to  pay  more  now  because:  i)  P1  holds  more spectrum  now  following  the  award  of  the  LTE  spectrum;  and  ii)  P1’s losses narrowed to MYR101m in 2012 from MYR174m in 2010.  

- DiGi on the prowl too? Besides TM, DiGi is also rumoured to be eyeing P1’s spectrum. It is widely known that DiGi has limited 900Mhz spectrum and  needs  more  to  refarm  the  1800Mhz  spectrum  for  LTE  use.  The 2.6Ghz  spectrum  that  P1  owns  may  not  be  the  most  optimal  given  its poorer  propagation  qualities,  but  we  think  DiGi  may  not  have  many options  left.  The  company  may  choose  to  compress  traffic  on  the 1800Mhz  spectrum  to  free  up  some  capacity  for  LTE  services,  but  we think there are limits to this approach as quality may be compromised.

- Maintain UNDERWEIGHT. We maintain our UNDERWEIGHT stance on the  sector  due  to  a  lack  of  catalysts  while  valuations  remain  stretched amid rising bond yields.  We believe there is little dividend upside within the sector in the short term with the exception of DiGi (which is to decide on business trust structure by year-end).

Source: RHB