While  competition  in  domestic  bandwidth  remains  intense, management  still  expects  stronger  quarters  ahead  –  driven  by  lumpy international bandwidth sales. TDC’s data centre business   is currently in  a  gestation  period,  but  could  see  an  inflection  point  in  the  next quarter  or  two.  We  remain  NEUTRAL  on  the  stock,  with  our  FV unchanged at MYR3.95 due to a lack of catalysts.

• Competition  still  intense.  Management  cautioned  that  domestic wholesale  bandwidth  competition  remains  somewhat  intense,  as  the incumbent,  Telekom  Malaysia  (T  MK,  NEUTRAL,  FV:  MYR5.30),remains  aggressive.  This  has  weighed  down  the  pricing  for  domestic bandwidth.  Nonetheless,  management  expects  growth  to  pick  up  in 4Q13 when more  indefeasible right of use  (IRU) sales, which tend to belumpy, are seasonally booked in.
• Data centre  to see turning point  soon.  There is still an oversupply of data  centre  space  in  Cyberjaya,  but  TDC  believes  that  its  data  centre segment  could  see  an  inflection  point  in  revenue  growth,  possibly  in 4Q13 or 1Q14. Management is now seeing a progressive take-up of data centre space (currently ~20% occupied) and believes full utilisation of its 11,000  sq  ft data centre facility in Cyberjaya could  be achieved by end-2014. Competitive intensity  should ease going forward,  as one of  TDC’s major  competitors,  CSF  Group,  is  currently  experiencing  losses  and appears to be holding back its expansion plans.
• Asia  Pacific  Gateway  (APG)  cable  on  track.  Management  indicated that the APG cable remains on track for completion in 1Q15.
• Risks.  The  risks  include:  i)  a  sharper-than-expected  decline  in international bandwidth prices, and ii) stiffer domestic competition.
• Forecasts. We maintain our forecasts.
• Investment case.  Maintain  NEUTRAL  on  TDC,  with  FV  unchanged  at MYR3.95. While we like the stock  as a direct play to strong demand  for international  bandwidth,  we  think  it  lacks  catalysts  in  the  absence  of M&As  to  enhance  its  regional  presence.  Also,  its  valuation  is  partly attributable to DiGi (DIGI MK, SELL, FV: MYR4.10),  which accounts for 25% of its SOP valuation. We think DiGi  lacks catalysts  too, barring  the setting up of its business trust.

Financial Exhibits

SWOT Analysis

• TDC diversified into the international submarine cable business in 2012 after acquiring a 10% stake in the Unity cable (Japan-US link)

Company Profile
Time  dotCom  Berhad  (TDC)  is  the  second-largest  fixed  line  player  in  Malaysia.  The  company  is  also  involved  in  the  international submarine cable and regional bandwidth business.

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Source: RHB