Two heads better than one?

TM: Two heads better than one?

Bodhi Tan

TELEKOM Malaysia Bhd (TM)’s recent announcement that it would split the company into two caught the market off-guard. Not surprisingly, as the market buzz then was that TM would announce the bagging of a major contract.

Still, the announcement turns out to be a surprise, and a pleasant one, for both analysts and investors. TM’s share price shot up and closed over 9% on the first day of trade following the announcement.

Analysts welcomed the demerger, and were generally excited about how the exercise would unlock TM’s potential, especially its overseas and mobile assets.

The proposed demerger involves the breaking up of TM’s mobile and fixed- line businesses into two separate entities. It will involve an internal restructuring whereby its wholly owned Telekom Enterprise Sdn Bhd will transfer mobile operator Celcom (M) Bhd to TM International Sdn Bhd.

TM’s mobile and non-Malaysian businesses will be grouped under TM International and will be listed on the main board of Bursa Malaysia upon completion of the demerger, expected to be completed by the second quarter of 2008.

TM says following the demerger, its remaining businesses will comprise fixed-line voice, data and broadband services and it will remain listed as TM on the stock exchange.

TM’s public-listed subsidiaries, namely Indonesian PT Excelcomindo Pratama TBK, Sri Lanka Dialog Telekom Ltd and Malaysia-listed VADS Bhd, will remain listed on their respective stock exchanges.

TM chairman Tan Sri Md Radzi Mansor told reporters that the demerger `will create two listed telcos, both of which could potentially enjoy the status of being among the largest companies by market capitalisation on Bursa Malaysia’.

Its group CEO Datuk Abdul Wahid Omar said the demerger would make TM International a compelling investment option and that the group may sell stakes in TM International to foreign strategic investors.

Khair Mirza from Aseambankers says, `TM International catches the imagination. Concentrating the overseas and mobile assets in eight different countries under TM International will create a unique investment opportunities for both local and international investors.’

He says TM International will likely draw a premium to its regional peers as it could potentially `draw on the combined balance sheet strength, resources and synergies of its constituent assets’.

`There is also a fair chance that TM International will be a sufficiently attractive entity to attract a major strategic investor post- demerger,’ says Khair, who has upgraded TM to a `trading buy’ from a `hold’, with a target price of RM11.70.

Jeffrey Tan of OSK Research says, `The key investment proposition here is the option granted to shareholders to partake in the mobile growth story by virtue of the shares offered in TM International and exposure in the stable recurring revenue model generated by TM.’

`On the whole, we believe the demerger is positive on two counts: that it would further unlock the value and potential of TM’s mobile assets in the region, which are the key earnings driver of the group, and remove the disparity in valuations from the en-bloc discount accorded to its weaker fixed-line franchise,’ he adds.

Tan says TM International would fill the void left by Maxis Communications, which was taken private, and places TM International’s worth at RM8.08 per TM share based on estimates that TM International’s equity value is in the range of RM27 billion to RM28 billion.

OSK has upgraded TM to a `trading buy’ from `neutral’ and also revised higher its target price to RM11.90 from RM11.40 following the demerger announcement.

On TM’s outlook post-demerger, Aseambankers’ Khair says TM’s challenges `will remain unchanged’.

`TM’s prospects are promising but execution and timeliness pose key question marks. First-half 2007 results suggest that revenue and market share erosion of its fixed-line business have been addressed.

`With growth in the fixed-line business challenging and Internet penetration below ideal targets, much will depend on how quickly and efficiently TM can roll out the high speed broadband project, and how quickly it can persuade consumers to switch from current Internet subscription packages to the new high speed broadband offerings,’ he says.

DBS Vickers’ analyst Ong Boon Leong expects TM to be more effective post-demerger.

He says the demerger structure has `greater clarity, transparency, and accountability’, which will have separate key performance indicators that will push TM’s fixed-line division to be more efficient.

OSK Research’s Tan notes that TM, with an estimated equity valuation of RM12.2 billion, would still be among the Top 30 KL Composite Index stocks, `trailing Digi’s market cap of RM16.1 billion’.

Tan says TM would be able to focus on the pursuit of its regional Internet protocol hub aspirations and grow its domestic broadband business, estimated at 1.1 million subscribers in June 2007, more aggressively.

But while the demerger looks good on paper, analysts caution that the deal is not yet done and that many more details need to be known before a more thorough and fuller assessment can be made.

`Though key principles of TM International’s spin-off were revealed and TM’s strategic directives were announced, significant details remain work- in-progress. In these nine or so months to TM International’s time-tabled spin-off by Q208, further disclosures should shed light on the potential attractiveness of the demerged entities,’ says Khair.

FACT FILE

TELEKOM MALAYSIA BHD

ISSUED CAPITAL:

RM3.4 billion

BOARD OF DIRECTORS:

Tan Sri Muhammad Radzi Mansor (Chairman)

Datuk Abdul Wahid Omar (Group Chief Executive Officer)

Datuk Ahmad Hashim

Datuk Azman Mokhtar

Datuk Dr Abdul Rahim Daud

Datuk Lim Kheng Guan

Datuk Nur Jazlan Mohamed

Prabahar NK Singam

Rosli Man

Dyg Sadiah Abg Bohan

HIGHEST-PAID DIRECTOR:

Datuk Abdul Wahid Omar (RM1.1 million)

SUBSTANTIAL SHAREHOLDERS: Khazanah Nasional Bhd – 40.9%

Employees Provident Fund – 12.5%

Bank Negara Malaysia – 7.3%

LATEST RESULTS: Net Profit of RM2.06 billion for financial year ended Dec 31, 2006.

Copyright 2007

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