TM's near-term growth is expected to be driven by broadband services, comprising: (i) wholesale - as TM targets provision of fiber backhaul for the second 5G network, and (ii) home fiber - as TM turned aggressive in defending and expanding Unifi's market share. Additionally, TM is focusing on cost-effective entry level GPU-as-a-Service for its customers. Nevertheless, it is open to procuring higher-end GPUs if customers demand progresses toward advanced AI workloads. We maintain our forecasts, TP of RM7.53 and OUTPERFORM call.

We came away from a meeting with TM feeling optimistic of its aggressive strategy for Unifi broadband and promising prospects for its data center joint venture (JV) with Singtel. Key takeaways include:

Unifi amplifying efforts to defend market share. TM has entered into "aggressive mode" to defend and expand Unifi's market share in response to intensified competition since 2HCY24. To this end, TM plans to escalate its marketing efforts in 2025-26, including offering subsidized electronic devices for Unifi's service plans, to retain existing customers and attract new subscribers. According to TM, this marks a significant departure from its traditional approach, which was primarily defensive and refrained from aggressive competitive measures.

Eyeing provision of fiber backhaul services for second 5G network.

TM is keen to be an infrastructure partner with U Mobile in developing Malaysia's second 5G network (NW2) via provision of fiber backhaul services. This would be largely similar to TM's existing 10-year RM2b fiber leasing service contract (start: 2021) for the first 5G network developed by Digital Nasional Berhad (DNB). In our view, TM is the leading contender for NW2's fiberization given its substantially larger and more extensive fiber footprint vis-à-vis its domestic competitors such as TIMECOM.

On the other hand, we believe TM does not intend to participate as an equity partner in NW2. However, it is indifferent towards seeking 5G access from either NW2 or DNB's network.

Near-term growth driven by internet and data segments. Looking ahead, in the near to medium term, TM is most optimistic of earnings growth in its retail (Unifi) and wholesale (TM Global) segments. Unifi is expected to benefit from its renewed aggressive market stance, while TM Global is poised for growth due to an expected increase in wholesale demand from NW2 (as mentioned above). On the back of this, we see potential upside risk to our forecasts, which do not account for the possibility of TM capturing significant market share from its competitors or securing NW2's fiberization contract.

Traction in postpaid mobile is surprisingly stronger. Unifi Mobile TM revealed strong uptake of its quad-play convergence packages that bundle Unifi Mobile postpaid plans with home fiber, fixed-line voice and TV content. Notably, TM currently has a higher proportion of postpaid users compared to prepaid. This is favourable for TM as it allows it to bypass the typical trajectory of most start-up mobile providers. New players often start out by targeting prepaid users, and later attempt to migrate them to postpaid plans to achieve higher ARPU and lower subscriber churn.

However, 5G access fees may drag costs. On a less optimistic note, we foresee potential cost headwinds for TM, as we do not rule out the possibility that it may incur full 5G annual access capacity payment of RM288m to DNB starting in 2025. In contrast, fees paid to DNB in 2024 were significantly lower, as they were based on actual 5G traffic volumes. The increased cost could impact TM's bottomline, considering Unifi Mobile's relatively small subscriber base, which limits 5G monetization opportunities.

Data center capacity will double by this year. Over the longer term, TM is also excited about its prospects in the data center (DC) space. TM Global plans to nearly double its DC capacity to a combined IT load of 20MW by 2025 through expansions at: (i) Klang Valley Data Centre (KVDC) in Cyberjaya, and (ii) Iskandar Puteri Data Centre (IPDC) in Johor. Both DCs have been operational since 2017-19, with the recent decision to expand driven by a sharp surge in demand. While IPDC has secured an anchor tenant for its additional capacity, KVDC's new IT load is expected to be swiftly taken up by customers who have expressed interest ahead of its construction.

Locked-in electricity supply for TM-Nxera's remaining phases. The TM-Nxera JV is currently undertaking land clearing works for its upcoming DC (Phase 1: 64MW) that is targeted for completion by end-2026. The JV is upbeat that its capacity will be swiftly taken-up at competitive international rates, driven by spill-over demand from Singtel's DC customers in Singapore.

To support this demand, TM's recent acquisition of a Facilities-Based Operator license in Singapore enables it to provide seamless and secure DC-to-DC connectivity across Thailand, Malaysia, Singapore, and Batam, Indonesia. Furthermore, TM has secured electricity supply from TNB for the JV's remaining planned capacity of 136MW (total: 200MW), which will cater to robust pent-up demand in future. Looking ahead, as part of Singtel's regional DC network, the JV could potentially host RE:AI, Singtel's new Artificial Intelligence Cloud Service (AI Cloud).

Grand ambitions to expand its DC business. If TM's DC business continues to gain momentum, the group envisions regional expansion into ASEAN markets, growing in locations where it has existing submarine cable landing stations. To explore these opportunities, TM has engaged in preliminary discussions with incumbent telcos across several SEA nations regarding potential JVs. Looking ahead, should TM's DC business achieve sufficient scale, a future strategy could involve a separate spin-off, potentially through a public listing or other suitable mechanisms.

Gradual ramp up for GPUaaS. TM is strategically positioning its newly launched GPU-as-a-Service (GPUaaS) offering, powered by Nvidia GPUs, to cater to evolving market demands. As a start, TM will focus on deploying entry-level Nvidia GPUs for its recently secured international customer at IPDC. According to TM, this reflects current regional preference for cost-effective basic compute capacity, rather than advanced AI applications and use cases. However, TM is adopting an agile approach, and remains open to procuring higher-end Nvidia GPUs, (eg. H100 and A100) to support its customers progression toward more sophisticated AI workloads.

Forecasts. Maintained.

Valuations. We also keep our TP of RM7.53 based on unchanged 7.0x FY25F EV/EBITDA. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3).

Investment case. We like TM on account of: (i) it being leveraged towards secular data growth on the back of current trends such as digital transformation and proliferation of internet of things (IoT) devices, and the rise of cloud-based applications powered by generative AI, etc, (ii) it benefitting from JENDELA phase 2 projects via roll-out and monetization opportunities, (iii) earnings accretion from new DC business, and (iv) higher demand for data transmission via its network of digital infrastructure (ie. submarine cables and landings, terrestrial fiber optics network etc). Maintain OUTPERFORM.

Risks to our call include: (i) cost drag from Unifi Mobile due to lack of scale, (ii) pricing pressures at the retail segment arising from policy-led directives, and (iii) market share loss from intense competition in the retail fiber broadband market.

Source: Kenanga Research - 5 Feb 2025