TIMECOM (FV RM0.87 - BUY) Company Update: Up, up And Away

We lower  our FY12/13 core profit forecast by 14%/1% after moderating  our assumptions to reflect the  higher  opex  related to  the  tie-up  with Astro  and incorporating  stronger wholesale revenue growth. The  company will wrap up its acquisition of 3 related businesses by mid-2012, which will be EPS accretive from the outset. This will potentially boost our FY13 EPS by 35%, all else being equal. We raise our FV to RM0.87 as we roll over to FY13. The key re-rating catalysts are:(i) stronger than expected results going forward, and (ii) improved earnings from the acquirees. Given the more than 10% upside from current levels, we upgrade TDC to a BUY.

 A terrific turnaround hands down. Since CEO Afzal Abdul Rahim took charge, TDC had undertaken a  major „cleansing‟, which seems to have  helped boost its earnings. Nonetheless, the surge in bottomline was also bolstered by the company‟s stellar topline performance. Last year alone, TDC‟s recurring revenue jumped 13% y-o-y, with all of its business segments clocking  in strong financial figures: (i) wholesale: +14% y-o-y, (ii) corporate & government: +12% y-o-y, and (iii) consumer & SME: +9% y-o-y. More notably, its operating profit spiked up 3-fold from RM18.7m to RM49.4m.

New recurring revenue streams start flowing. The company‟s acquisition of 3 related companies was initially scheduled to be completed by February but is now slated to be wrapped up by 1H2012 due to delays in obtaining the required approvals from the High Court and regulators. Nonetheless, we see low risk of the deal falling through given that the multiple proposals were approved by shareholders at the EGM last year. We expect the company to chalk up a core earnings CAGR of 35% over the next two years with the inclusion of the acquirees.

Upgrade to BUY, FV  RM0.87.  We are revising upward our FY12/FY13 revenue forecasts by 2%/4% to RM338.4m/RM373.7m on incorporating stronger growth from the wholesale segment. However, our FY12/FY13 core earnings estimates are trimmed by 14%/1% to RM88.6m/RM118.2m as a result of: (i) the high installation cost frontloaded from the rollout of Astro IPTV services (assuming a cost 12x of ARPU at RM100), and (ii) adjustments to our earlier forecast recurring expenses. Since our previous fair value (FV) of RM0.80 was computed based on FY12 numbers,  they did not  reflect TDC‟s growth potential  given the  high opex incurred during the early days of the Astro IPTV rollout. Thus, we are rolling over our sum-of-parts (SOP) valuation to FY13, from which we derive a FV of RM0.87. We are now upgrading the stock to a BUY. At  the  current price, consensus is only valuing the company at 9.3x FY13 PER based on the income purely generated by TDC.

Source: OSK188