TM’s data centre deal with Singtel a win

CGSI Research said the data centre investment would more than double TM’s effective data centre capacity.

PETALING JAYA: Telekom Malaysia Bhd’s (TM) proposed data-centre joint venture (JV) in Johor is expected to boost the long-term prospects of the telecommunications giant.

Optimistic about the potential outcome of the project, analysts are in consensus that the development would lift TM’s revenue and earnings growth in the coming years.

TM on Tuesday announced a plan to set up a 51:49 JV with Nxera MY Pte Ltd, a unit of Singapore Telecommunications Ltd or Singtel, to develop a 64 megawatt (MW) data centre in Johor. The first phase of the JV is expected to be operational by 2026. The aim is for the data centre to reach an ultimate capacity of 200MW.

TM’s equity commitment for the JV company is estimated at RM588mil.

CGS International (CGSI) Research said in its report that the data centre investment would more than double TM’s effective data centre capacity and, at the very least, open a new avenue of growth for the company.

It said while TM would take operational risk from the investment, the risks of this venture could be mitigated, given the current demand dynamics and a strong partner in Singtel, whose partner in the data centre business is global private equity firm KKR.

“Investors, in our view, should take this investment positively as it could provide TM with an added earnings growth avenue, which should, in our view, also provide for higher future return on equity ratios,” CGSI Research wrote.

It noted that the development would not only be incrementally positive for TM’s revenue and net profit growth, but it would also serve as a re-rating catalyst for TM’s shares, which currently trade at an undemanding 13.7 times the estimated price-earnings for financial year ending Dec 31, 2025.

CGSI Research reiterated its “add” call on TM, with an unchanged target price of RM7.30.

Meanwhile, UOB Kay Hian (UOBKH) Research maintained its “hold” call on TM, citing the good news had been partly priced in. Nevertheless, the brokerage raised its target price for TM to RM7 from RM6.50, factoring in the 64MW data centre to be operational in 2026.

“We understand that the JV may be able to secure sufficient power, water and fibre (connectivity) to allow for a timely foray in an increasingly crowded data centre play in Johor,” UOBKH Research said.

“Hence, speed to market remains a key advantage for the JV. This is premised on TM’s existing presence in Johor, alongside clout in the market as a government-linked company,” it added.

UOBKH Research estimated the impact on TM’s earnings before interest, tax, depreciation and amortisation to be between 1% (64MW) and 6% (200MW) for 2026, while equity accretion would be between 40 sen and RM1.33 sen per share, respectively.

It added that the blue-sky scenario (200MW data centre) would imply a fair value of RM7.80, but this would only materialise in 2030.

Kenanga Research said it was positive on the JV impact on TM, as Nxera’s customers in Singapore could potentially be long-term capacity offtakers for the proposed data centre.

The brokerage estimated that the TM-Nxera data centre would generate an internal rate of return of 12.4%, with a payback period of around eight years and net present value of nine sen per share for TM’s 51% stake.

Kenanga Research maintained its “outperform” call on TM, with an unchanged target price of RM7.53.

Public Investment Bank (PublicInvest) Research said the proposed JV would enable TM to tap the growing demand for data centres, driven by the adoption of cloud computing, artificial intelligence, eCommerce, edge computing and 5G.

“TM currently has total data centre capacity of only 20MW with its main facilities in Cyberjaya and Johor running at full capacity,” it said.

“We expect this (JV) to start contributing positively to the group’s bottomline, earliest from FY29, assuming a construction period of two years,” it added.

PublicInvest Research maintained its “neutral” rating on TM, with a higher target price of RM6.40 as compared with RM6.20 previously.

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