A Member of the TA Group MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603-20721277 / FAX: +603-20325048 COMPANY UPDATE Friday, March 28, 2014 FBMKLCI: 1,846.9 Sector: Telecommunication Telekom Malaysia Berhad TP: RM7.22 (+16%) Acquires Last Piece of the Puzzle THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* Last Traded: RM6.20 TA Research Team Coverage Tel: +603-2167 9601 kyliechan@ta.com.my www.taonline.com.my BUY Telekom Malaysia Bhd (TM) will acquire a 57% stake in Packet One Networks (Malaysia) Sdn Bhd (P1) for RM350mn. On top of that, TM will also subscribe to RM210mn of bonds issued by Green Packet Bhd (GPB) (30% stakeholder in P1) that are exchangeable to P1 shares. Therefore, TM s total investment in P1 amounts to RM560mn (RM350mn cash and RM210mn in bonds). The acquisition translates to FY13 EV/EBITDA multiple of 20x based on P1 s enterprise value of RM750mn. We deem this to be on the high side, far exceeding TM s FY13 EV/EBITDA of 8x. Nevertheless, we opine that the benefits of the acquisition (i.e. takeover of wireless spectrum and P1 s existing network sites) offsets the steep purchase price. TM will also enter into an agreement with Green Packet Berhad (GPB) and Korea s SK Telecom Co Ltd. (SKT) to collaborate on developing and providing 4G LTE services via P1. The shareholders of P1 (TM, GPB, and SKT) will also subscribe to the following securities (Figure 1):- Figure 1: Bond Issuance in relation to Acquisition Issuer Subscriber Security GPB TM 8-year Redeemable Exchangeable Secured Bond (EB) P1 TM (65%) SKT (25%) GPB (15%) 8-year Redeemable Convertible Unsecured Bond (CB) Max Proceeds (RM mn) Notes 210-8 year maturity. - 8% coupon. - Exchangeable to P1 shares in year 5-8 at market value. - Secured by GPB s entire 30% stake in P1. 1,650 - Joint investment to fund LTE Business. - Convertible into P1 shares at benchmark valuation. Share Information Bloomberg Code T MK Stock Code 4863 Listing Main Board Share Cap (mn) 3,576 Market Cap (RMmn) 22,180 Par Value (RM) 1.00 52-wk Hi/Lo (RM) 6.20/5.05 12-mth Avg Daily Vol ('000 shrs) 6,389 Estimated Free Float (%) 50% Beta 0.75 Major Shareholders (%) Khazanah Nasional - 28.7 Skim Amanah Saham - 13.2 EPF - 8.3 Forecast Revision (%) FY14 FY15 Forecast Revision (%) 0 0 Core Net Profit (RMm) 897.7 914.8 Consensus 922.4 983.6 TA/Consensus (%) 97 97 Previous Rating Buy(Maintained) Financial Indicators FY14 FY15 Net Debt/Equity (%) 63.0 69.0 FCF per share (RM) 0.05 0.09 P/FCF (x) 125.4 71.1 ROA (%) 4.0 3.9 ROE (%) 12.3 12.1 NTA/Share (RM) 1.96 2.02 P/NTA (x) 3.2 3.1 Share Performance Price Change (%) T FBMKLCI 1 mth 10.9 0.8 3 mth 13.6-0.8 6 mth 18.5 4.0 12 mth 14.8 10.8 (12-Mth) Share Price relative to the FBM KLCI This transaction is targeted for completion by 3Q14 and subject to approvals from GPB shareholders, MCMC and the Securities Commission (for bonds issuance). Source: Bloomberg Page 1 of 5
Post-acquisition, TM will hold 57% stake in P1, whilst GPB s stake will decrease from 55% to 30% (Figure 2). The remainder 13% stake is held by SKT, which is Korea s largest telco company with 50% market share. Figure 2: P1 s Shareholding Before & After Transaction Before After Minorities, 10% GPB, 30% SKT, 35% GPB, 55% TM, 57% SKT, 13% TM s near-term strategies for P1 include: 1) continued support for ongoing 4G WiMax operations, 2) clean-up of P1 s balance sheet to free up cash flow for opex, 3) ensure tower sites are not shut down due to lack of funds, and 4) improve quality of service (QoS) and re-engage with P1 s customers to arrest churn rate. TM is targeting a time frame of 12-36 months to successfully stabilise operations at P1. Thereafter, TM intends to embark on nationwide rollout of wireless 4G LTE services. Meanwhile, TM does not discount the possibility of offering voice-over-lte services in future given its enlarged spectrum holdings (Figure 3). To recap, P1 holds 20MHz of 2.6GHz spectrum that is approved by MCMC for transmission of 4G LTE services. Figure 3: Enlarged Spectrum Holdings 450MHz 850MHz 2.3GHz 2.6GHz Total (Ghz) TM 8.5 10 18.5 P1 30 20 50.0 TM intends to subscribe to the first tranche (RM120mn) of CB in FY14 and the balance (RM90mn) by FY15. Proceeds from the EB will be utilised by GPB for: 1) settlement of certain outstanding liabilities, 2) acquisition of minority stakes in P1, 3) working capital, and 4) subscription of the CBs. We believe that TM is able to easily finance this RM560mn investment via internal funds or borrowings given its healthy balance sheet (RM2.5bn cash and Net Debt/EBITDA: 1.1x as at end-dec 2013). Our Take Positives: Game Changer for TM in the Long Run Overall, we are positive on this deal as it enables TM to takeover valuable wireless spectrum resource, thus enabling the group to offer bundling of wireless broadband (WBB) with fixed broadband services. This would enlarge TM s market to include customers which seek mobility on top of faster speeds from fiber broadband. Page 2 of 5
TM is able to leverage on P1 s network footprint of 2,000 sites and cross-sell to P1 s subscriber base which totaled 543K in end-dec 2013. Management had previously indicated its goal to have 100k wireless subscribers by 2014 and 1mn by 2017. TM s ability to offer WBB and mobile voice services (in the longer term) enhances its product offering (Figure 4) and grants the group a competitive edge over its competitors, which include cellular providers Maxis, Digi, and Celcom. Figure 4: TM s Expanded Product Offerings Source: Company Management alluded that its 850MHz spectrum, which is currently undergoing a technology refresh exercise (upgrade from CDMA to 4G), is meant solely for USP (Universal Service Provision) purposes. This implies that this spectrum is solely meant for limited rollout of 4G services to rural areas for the benefit of underserved communities. In addition, we are comforted that TM is able to establish a long term partnership with GPB and SKT whom have a strong track record in deployment of LTE, unlike TM which is new to the wireless space. The EB, which is only exchangeable after the 5th year, ensures that GPB will remain as a substantial 30% shareholder in P1 (assuming GPB does not exercise early redemption at 10% gross up IRR). Negatives: Significant Capex Outlay and Possible EPS Dilution Assuming that TM is unable to turnaround losses at P1, and P1 maintains FY13 net loss of RM116mn in FY14-16, this translates to potential EPS dilution of 2% for TM in FY14 and 7% in FY14-16. Nevertheless, management is confident that P1 is able to improve its bottomline earlier than expected following TM s capital injection via the RM210mn EB and efforts to stabilise the business as detailed above. Meanwhile, TM will likely subscribe to 40%/30%/30% of TM s 65% entitlement (total: RM1.1bn) in the CB in FY15/16/17. This translates to average capex investments of RM390mn p.a. in P1 over 3 years which is about 13% of TM s capex spend in FY13. We are concerned that heavy capex requirements for both Unifi Phase 2 (yet to be announced) and P1 will impede TM s ability to pay out handsome dividends. Page 3 of 5
Impact Maintain earnings estimates pending finalisation of the deal. In light of TM s new competitive edge following this acquisition, we take the opportunity to increase our terminal growth rate for the stock to 2.4% (previous: 2.0%). Valuation Reiterate Buy on TM with revised DDM (WACC: 6%) target price of RM7.22 (previous: RM6.57). This game changing acquisition reinforces our bullish view of TM s earnings prospects which are propelled by: 1) multi-year earnings expansion from HSBB Phase 2, 2) boost in broadband ARPUs from rapid take-up of HyppTV and upselling of Streamyx services, and 3) benign competition from Maxis Home Fibre Internet services. Figure 5: Key Terms of the EB and CB Source: Company Page 4 of 5
Figure 6: Earnings Summary (RMmn) YE 31 Dec 2012 2013 2014 2015F 2016F Revenue 9,993.5 10,628.7 11,341.3 12,074.7 12,792.8 EBITDA 3,213.0 3,076.5 3,815.6 4,094.3 4,439.7 EBITDA margin (%) 33.3 28.9 33.6 33.9 34.7 Normalised EBITDA 3,233.3 3,518.9 3,815.6 4,094.3 4,439.7 Normal EBITDA margin (%) 31.6 33.1 33.6 33.9 34.7 Pretax Profit 1,069.6 1,046.0 1,255.2 1,279.2 1,362.9 PATAMI 1,263.7 1,012.2 897.7 914.8 976.7 Adjusted PATAMI 881.0 1,038.5 897.7 914.8 976.7 EPS (sen) 35.3 28.3 25.1 25.6 27.3 Normalised EPS (sen) 25 29 25 26 27 Normal EPS growth (%) 38.7 17.9 (13.6) 1.9 6.8 Normalised PER (x) 25.2 21.4 24.7 24.2 22.7 Gross Divd/Share (sen) 22 26 26 26 27 Gross Divd Yield (%) 3.5 4.2 4.2 4.2 4.3 Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. for TA SECURITIES HOLDINGS BERHAD (14948-M) MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603-20721277 / FAX: +603-20325048 (A Participating Organisation of Bursa Malaysia Securities Berhad) Kaladher Govindan Head of Research Page 5 of 5