KENANGA :TM - HOLD - 21 Apr 2008

TM – Demerger valuations (Company Update)



Price: RM11.10

Target Price: RM12.00

Recommendation: HOLD



As a recap, Telekom Malaysia (TM) will be demerged into two separate entities by the end of the month, clearly delineating the fixed line business from the mobile. Merits for the demerger as cited by management is to create further shareholder value through accelerated operational improvement and growth with each entity having the freedom to pursue clearly distinctive aspirations and strategies.

TM International (Fair Value RM7.17)
· So far, market excitement seems to skew towards the mobile segment with clear expectations for higher growth driven by possible geographical expansion couple with still low mobile penetration in key growth markets including India and Indonesia. During the numerous teleconferences with management, it has always been guided that key focus for the unit will be centred on South and South East Asia. Benefit of grouping Celcom under the new unit not only offers size and economies of scale in terms of operation but to provide the necessary leverage and clout to any possible M&A possibility.

· Even though management is unable to provide guidance on any possible synergistic savings, suffice to note that management is most optimistic that the new cellular entity will expect cost improvements and higher productivity on account of being relatively more focused (market share and margin management) to be augmented by enhanced capex management (i.e. hormonisation of technology choices). On this front, we continue to be cautious especially given an increasingly competitive landscape going forward which could very well cap any upside risk to margins.

· Despite the latent growth potential, risk we believe is equally high especially in the emerging markets of South Asia and South East Asia. Execution let-downs have been experienced in markets such as Sri Lanka and Bangladesh while inability to secure the necessary licenses in India had blunted their progress, leaving them way behind. While new CEO designate Dato Jamaludin Ibrahim had a sterling record during his tenure at Maxis, challenges we believe should remain high for the new unit.

· After tweaking our numbers post FY07, we have derived a fair value of RM7.17 for TMI based on its Sum-of-Parts.







KENANGA INVESTMENT BANK BERHAD (15678-H)