Time dotCom - As The Wheels of Change Turn

After our conference call with management last Friday, we are raising our FY12 core earnings forecast by 5.7% but retaining our FY13 estimates. We are also changing our SOP components and arrived at a new FV of RM4.52. This implies a FY13 PE of 15.9x, which provides a 33% upside on the current share price. Minus the market value of DiGi, investors are only valuing the enlarged TDC group at a 6.2x FY13 PE. We find the stock grossly under-valued. Maintain BUY.

Margins compression should go away. In the last 44 days of 1HFY12, the high margins contributed by the group’s newly-acquired companies had been due mainly to the sales of 20Gbps-IRU contracts. However, in evaluating their half-yearly contributions, we found that margins were actually compressed (please refer to Table 1). We have insufficient information on this but believe that management may address the situation since it has a recent history of being cautious on cost. Also, we believe margins should recover going forward on the back of positive synergies derived from the acquisitions, the focus on regional bandwidth sales and the data center business.

Strong appetite for submarine cables, data centers. We understand that 290 Gbps of the Unity Cable’s total rated capacity of 480 Gbps have been taken up and management is looking to increase its lit capacity gradually to meet demand. We also understand that the capacity can be upgraded to a maximum of 960Gbps. For the data center business, TDC intends to increase its net floor space by another 15k sq ft to 60k sq ft. Management expects to spend RM150m more in capex and did not rule out the possibility of gearing up to finance these investments.

Astro IPTV still a laggard. Management said the 2QFY12 revenue contribution from Astro IPTV was still at a minimal RM1.3m but added that it has received positive response to the service in the past three months. However, we continue to hold the view that the company may find it tough signing on new subscribers since most Astro households would already have an existing broadband connection and competition from new IPTV entrants. We have assumed a 5% take-up based on the target 167k premises to be fiberized by the year-end.

Maintain BUY, revised FV RM4.52. We are raising our FY12 core earnings forecast by 5.7% but are retaining our FY13 estimates for now. The FY12 revision reflects the group’s better-than-expected performance for the current quarter. We are also changing our SOP valuation components since management is looking to spend more capex, which will stretch its ROI over a longer horizon. Taking into account TDC’s net cash after capex but not earnings capacity for the next two to three years will reduce our FV for the enlarged TDC group.

Source: OSK