Telekom Malaysia - In Nusajaya project

News   Telekom Malaysia Bhd (TM) announced that it has signed two agreements with several companies to transform and develop Nusajaya into a smart and connected city. 

 The first agreement is a 5-party collaboration agreement (CA) with Iskandar Investment Bhd (IIB), UEM Land Bhd (UEML), Centios Co. Ltd (CENTIOS) and CISCO System Intl’ (CISCO) to establish a managed service operating company and global innovation centre for the proposed smart and connected Nusajaya project.  

 The second agreement with IIB and UEML is to participate in the development and management of the proposed smart and connected Nusajaya Project. 

 The CA is valid for a period of six months or until the execution of the definitive agreement(s), or such other dates that may be mutually agreed upon in writing by the parties. 

 TM indicated that further updates including the financial effect and other relevant information will be disclosed when the definitive agreement(s) has been inked. 

Comments   We understand that the collaborations are to enhance the communications services and infrastructures in the area via TM’s High Speed Broadband – UniFi and TM WiFi. On top of that, TM will also able to establish a onestop centre in Nusajaya to support the telecommunication and ICT requirements of enterprises and businesses in the area. This will benefit TM’s enterprise and government segments in the long run, in our view.

 TM has made its UniFi service available in Nusajaya since July 2010 and has also brought the service to all the five flagship zones in Iskandar Malaysia, covering more than 67k premises to date. 

 While the collaborations provide a new growth opportunity to TM, the financial impact will only likely come in the next 3-5 years in view of the current ongoing development progress of Nusajaya, which is still in the early stages. 

Outlook   TM’s outlook remains solid despite the escalating competition in its home broadband segment. 

  

Forecast  No changes to our FY12-FY14 earnings forecasts. 

Rating   Maintain OUTPERFORM

 TM continues to be our TOP PICK in the telco sector due to its strong dividend yield, solid presence in the fibreto-the-home market and the lesser competition seen in its wholesale and fixed-line segments.  

Valuation   Maintaining our Target Price at RM6.25 based on a targeted FY13 EV/forward EBITDA of 7.3x (+1.5 SD).

Risks   A higher-than-expected capex may affect our FY12 dividend assumption where we are expecting TM to announce another capital initiative plan given its declining capex trend.     

Source: Kenanga