Affin Hwang Research anticipates TM to secure a similar fibre leasing contract from the second 5G operator.
PETALING JAYA: The termination of the share subscription agreement (SSA) by Digital Nasional Bhd (DNB) has lowered Telekom Malaysia Bhd
’s (TM) chance in the tender for the second 5G network, but it may be a blessing in disguise.
The development of a second 5G network presents a new business opportunity for TM’s fibre leasing business and it can also deploy capital to expand its other businesses, said Affin Hwang Research.
With its vast network it can provide fibre leasing to new operators and enjoy a likely improvement in 5G product offerings or service levels driven by higher competition in the 5G wholesale market.
In May 2024, Communications Minister Fahmi Fadzil said completing a stake or SSA in DNB was a prerequisite for telecommunication companies that wish to vie for the second 5G network.
TM had also in December 2021 signed a 10-year fibre leasing service agreement with DNB worth RM2bil to provide 5G fibre leasing services for connectivity between DNB’s 5G mobile sites and nodes, leveraging TM’s domestic fibre cable network.
A robust fibre network is the backbone for 5G deployment, and hence, the research house anticipates TM to secure a similar fibre leasing contract from the second 5G operator.
But the contract value may be lower as the second operator may tap into some of the existing infrastructure for its network deployment.
Besides that, data centres are also a key growth driver for TM.
It currently operates seven data centres and seven Edge facilities that contribute an estimated 1% to 2% of the group’s revenue.
It reiterates a “buy” call on TM with a target price of RM7.80 a share.
It likes TM for its extensive submarine cables and fibre infrastructure, attractive valuations vis-à-vis domestic peers and its data centre aspirations.
The key downside risks cited are weaker-than-expected earnings due to stiff competition/cost pressures, negative regulatory changes and protracted delay in executing its data centre expansion plan.
It revised its 2025 to 2026 earnings per share (EPS) forecasts by 1% to 2% after fine-tuning its revenue assumptions and incorporating the finance costs for the funding of a data centre joint-venture with Singtel’s Nxera.
It forecast TM’s core pre-tax profit to grow by 3% to 4% per year in 2024 to 2026, driven by higher revenue and lower interest costs due to loan repayments.
TM has been generating positive free cash flow over the years and the group had progressively lowered its gross borrowings from RM10.4bil at end-2019 to RM6.4bil at end-2023, thereby lowering its finance costs over the period.
It projects TM to continually pare down its borrowings and reduce its finance expenses.
It expects TM’s core EPS to dip by 20% year-on-year in 2024 due to the absence of tax credit, before resuming its growth trajectory albeit at a weak 1% to 4% in 2025 to 2026, before the earnings contributions from the new data centre materialises in 2027.
