TM had called for a briefing to provide additional details on the recent proposed joint venture (JV) with Singtel's regional data centre arm, Nxera MY Pte Ltd (Nxera), to develop a data centre in Johor, Malaysia. Generally, we maintain a positive view of the deal. The proposed JV will have a strong competitive edge to capture the rising demand and opportunities from the next generation of AI application providers and multinational companies. Maintain a Buy call on TM with an unchanged target price of RM7.70.

JV With Nxera to Develop a New Data Centre in Johor

Recap, TM has proposed to set up a JV with Nxera to develop a data centre in Johor, Malaysia. With an initial investment of RM1.2bn, the four-storey building will be equipped with high power density and feature advanced technologies to support heavy workloads and operations. TM will hold a 51.0% stake, while Nxera will hold the remaining 49.0% in the JV. The JV has signed a conditional sale and purchase agreement with River Retreat Sdn Bhd to acquire a 168,959 square metre freehold land in Pulai, Johor Bahru, for RM178.2mn. The data centre is expected to be operational in 2026.

TM believes that this is a win-win deal, emphasizing the strategic benefits for both parties. For Nxera, it has a proven track record in developing state-ofthe-art data centres and a strong marketing network to capture the demand from Singapore. Meanwhile, TM will leverage its extensive submarine and fibre optic cables to provide vital connectivity between Malaysia and other regions, enhancing its position in the market. TM currently owns 35 submarine cable systems with more than 720,000km of domestic fibre optic cables.

With the initial capacity of 64MW, the JV targets to fill the capacity over 2-3 years. Thereafter, the JV intends to scale up to 200MW in a few phases. Management has confirmed that the group has conducted the pre-sales and that the feedback is generally favourable. The management is confident that the JV will be able to secure the clients' final commitment before completing the data centre. The management also guided that 5.0% of the capacity is planned for AI requirements. In the event of overwhelming demand for AI, the JV can tweak the design to cater for higher AI requirements. Meanwhile, after obtaining all the necessary approvals, the JV will call for an open tender for the data centre construction works.

Our View

We maintain a positive view of this JV as it will further strengthen TM's leading position in Malaysia's data centre landscape. Despite increasing competition in the data centre space, we believe the JV will have the advantage in terms of connectivity network and connectivity costs. In all, we believe the JV will have a strong competitive edge to capture the rising demand and opportunities from the next generation of AI application providers and multinational companies.

Impact

Maintain FY24 to FY26 Earnings Forecasts.

Valuation & Recommendation

No change to our target price of RM7.70, based on DCF valuation with a WACC of 8.5% and LT growth rate of 2.0%. Reiterate a Buy call on the stock.

Source: TA Research - 21 Jun 2024