• Upgrade to BUY from Neutral, with a higher DCF-derived TP of MYR6.0 from MYR5.80, 13% upside and c.13% FY23F yield. We turn more positive on Time dotCom following a recent visit to the Cyberjaya data centre (AIMS@CJ). Our renewed optimism is supported by its timely capacity expansion to meet structural demand, data centres (DC) being a core economic imperative, and the higher premiums accorded for infrastructure assets in the new normal. We also see continued robust growth for the group’s retail broadband segment, helping to fuel its 11% FY23-25F earnings CAGR. Our TP includes a parity ESG score.

• Aiming high. AIMS@CJ is the extension to TDC’s fully tenanted flagship DC site in downtown Kuala Lumpur (Menara AIMS@KL1). With a tier-3 certification, it appeals to a slightly different clientele base where the central location is not a key prerequisite. The first phase (6.5MW/60,000sq ft) was commissioned in 3Q21 with capacity taken up in less than 12 months (over 20 tenants), ie ahead of our expectations. Construction work for phase 2 (8MW/60,000 sq.ft.) should be completed by year-end, with capacity pre-sold for the first two floors. AIMS is also retrofitting the new KL2 site (previously Bangunan KWSP), located opposite Menara AIMS to meet overflow demand with a single floor being operational (~1MW).

• Some concerns on incoming inventories but risks are manageable. Given the heightened news flow on new DC investments in recent months, there are concerns that the local DC market may eventually see a supply glut. Based on press announcements made, up to 1m MW (Figure 5) of additional capacity is expected to come on-stream over the next 2-3 years, with Johor’s Sedenak Technology Park (STP) and Cyberjaya being the two hotspots for newbuilds. Management nonetheless sees the risks as manageable given: i) The strong structural drivers at play, ie robust demand for cloud, managed solutions and disaster recovery services, ii) the phased approach typically undertaken for upgrades, and iii) Singapore’s tightened conditions for DC builds which have contributed positively to the inventory overflows to Malaysia. We also view the notable investments by hyperscalers benefitting co-location DC providers, with pre-committed take-ups of capacity.

• Strong earnings momentum to continue. We lift FY24-25F core earnings by 3-7% after factoring in incrementally stronger growth for the broadband segment and DC share of profits (previously adjusted for the DC sale to DigitalBridge). Note that the stock’s foreign shareholding level has crept up from under 9% a year ago to c. 13% at end-June. TDC is slated to announce its 2Q23/1H23 results on 18 Aug.

• Key downside risks are weaker-than-expected earnings, retail broadband competition and lower than expected dividends.

Source: RHB Research - 27 Jul 2023