TDC yesterday entered into a  construction and maintenance  agreement for the AAE-1 submarine cable system. We view this positively, as it will give  the  company  connectivity  to  most  of  the  major  regions.  While earnings  contributions  will  only  materialise  in  2016,  we  maintain  our BUY call with a revised MYR5.20  FV (from  MYR4.30)  after changing our valuation method to DCF (from P/E).

• Connecting  to  Europe.  Time  dotCom  (TDC)  announced  that  it  has entered  into a  construction and  maintenance agreement (CMA) for  said works  on  the  AAE-1  submarine  cable  system  (AAE-1)  with  17 consortium  members.  We  are  positive  on  this  as  the  AAE-1  will complement  the  upcoming  Asia  Pacific  Gateway  (APG)  and  existing Unity cable, thus raising its regional profile for international bandwidth.
• Investments required. TDC is expected to spend USD44m (MYR143m) to  secure  1.88  terabits  per  second  (Tbps)  of  capacity  in  the  AAE-1.  It should  have  no  issue  raising  external  funds  given  its  relatively  under geared balance sheet (0.7x gross debt/EBITDA ratio).
• Completing  the  global  picture.  Currently,  TDC  only  has  Japan-US connectivity via its 10% stake in Unity cable. With the AAE-1,  it  will have connectivity to South Asia, the Middle East and Europe from Malaysia by 2016.  This  implies  full  connectivity  to  most  of  the  major  regions. Therefore,  it  is  well  positioned  to  further  capture  the  high  growth  in international bandwidth.  
• Forecasts. Maintained as the AAE-1 is only operational in 2016.
• Investment  case.  Maintain  BUY  with  a  revised  MYR5.20  FV  (from MYR4.30)  after  incorporating  the  potential  earnings  from  AAE-1  and changing our valuation method to DCF (WACC of 7.4%)  from P/E.  We still  like  TDC  as  a  direct  play  to  the  strong  demand  for  inte rnational bandwidth, although earnings contribution from APG and AAE-1 will only kick in from 2015 and 2016 respectively.  Therefore, we view DCF as a better  valuation  method  to  capture  the  longer  term  potential  of  the submarine  cable  business.  Any  2014  M&As  that  may  enhance  its regional  presence  and  drive  the  international  bandwidth  business ,  as guided by management,  are potential re-rating catalysts.

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Source: RHB