Affin Research positive on Telekom Malaysia's purchase of Packet One

KUALA LUMPUR: Affin Investment Research is positive on Telekom Malaysia's (TM) acquisition of a 57% stake in Packet One (P1) as it expands TM's scope of providing broadband solutions.

It said on Friday, P1 should complement TM's existing business while there is limited overlap in terms of TM and P1's existing network coverage.

"While the deal will have negative implications in the near term, we do not expect this to be persistent. Moreover, management has assured that TM's dividend capability will not be impacted," it said.

To recap, Affin Research said TM was teaming up with Green Packet and SK Telecom where TM would hold a 57% stake in P1.

P1 is largely focussed on large screen data on WiMax. P1 also has a nationwide network footprint of about 2,000 WiMax sites with about 500,000 customers.

Affin Research said the RM1.55bil investment will be paced out over the next few years and over a couple of instruments although the initial outlay will be via a capital injection of RM350mil into P1.

TM would then subscribe to an exchangeable bond of RM210mil and further joint investments of RM990mil (via a convertible bond where TM's entitlement ratio would be 60%) to fund P1's rollout of its LTE network.

"The rationale for TM's investment in P1 is largely to expand its wireless broadband capabilities which will primarily be on the 2.3GHz WiMax and 2.6GHz LTE spectrum bands.

No shareholder approval is required for TM, although the deal is subject to approval by Green Packet's shareholders and the Malaysian Communication and Multimedia Commission (MCMC) while the bond issues require approval by Securities Commission Malaysia. The transaction is expected to be completed by 3Q2014," it said.

For the year ended Dec 31, 2012, P1 reported a revenue, EBITDA (earnings before interest, tax, depreciation and amortisation) and net loss of RM337mil, RM29mil and RM124mil respectively.

Based on an estimated enterprise value (EV) of RM200mil to RM258mil (depending on final liabilities to be settled), the deal is effectively priced at an EV/EBITDA of 6.9 times to 8.9 times, on parity or higher than TM's FY14E EV/EBITDA of 6.9 times, which it thinks is fair.

Assuming a similar level of losses in FY14, Affin Research said it could potentially see a 1.9% dilution to TM's EPS upon consolidation of one financial quarter for P1 in FY14 (approximately 6% in FY15).

"In our view, P1's losses should not stretch into FY15, considering the rejuvenation of P1 following the injection of fresh funds. We understand that the losses at P1 were largely due to a perception of poor network quality and weak customer retention as a result of a lack of funding," it said.