KUALA LUMPUR (Oct 2): Telekom Malaysia Bhd (KL:TM) data centre joint venture (DC JV) with Singtel could potentially contribute RM80 million to RM85 million in earnings to the group, or 4% of group profit after tax and minority interests in FY2027, according to RHB Research in a note on Wednesday.

The research firm, which kept its “buy” call on the stock with a target price of RM8.40, said the DC JV earnings contribution translated into 37 sen to TM’s discounted cash flow (DCF) valuation. 

"We are positive on its landmark JV with Singtel to build a 64MW DC (Phase 1) in Johor to capture the spillover of DC inventories from the island state. 

"Together with the ongoing expansion of its twin core facilities in Cyberjaya and Iskandar Puteri (IT load capacity is set to double up to 40MW by FY26F), we see the DC Ebitda (undislosed but minimal currently in the overall context of the group) potentially doubling up in FY27F on optimal utilisation."

Separately, CIMB Securities said TM has secured a high level of commitment for its upcoming Iskandar Puteri data centre (IPDC) Block 2, while AirTrunk’s JHB1 data centre has fully contracted the total 150MW for its JHB1 DC.

"Overall, TM believes that strong demand will fill up the substantial incoming DC capacity in Malaysia over time. Over at JHB1 (150MW over two phases), AirTrunk (an Asia Pacific and Japan hyperscale DC specialist) said it does not do speculative building and had secured full tenant commitment before constructing Phase 1, which was ready-for-service since July 2024. "

CIMB Securities said the construction of phase two is now underway having been fully contracted out, with completion targeted for mid- to end-2025.

"Build-to-suit for hyperscalers, AirTrunk says its DC contract tenures are typically seven to 20 years."

The house also cited CBRE, which claimed Malaysia as one of the fastest growing Tier-2 DC markets in Asia-Pacific, with capacity expected to expand 383% based on the current pipeline.

The incoming capacity will serve not only the domestic market, but also international tenants that have made Malaysia their Asia-Pacific hub.

According to CBRE, Malaysia’s rapid DC development has been supported by the government’s proactive stance in encouraging investments since 2021, its well-developed telecommunications infrastructure and relatively cheaper DC construction cost (Johor: US$8.5 million, KL: US$10 million, Tokyo: US$10.5 million, Singapore: US$11.4 million, per MW).

RHB said data revenue is set to remain a core growth driver, as TM capitalises on the digital infrastructure boom.

It estimated TM’s internet revenue compounded annual growth rate (CAGR) for FY2023-2026F coming in at 5.1%, underpinned by the still-modest fibre broadband (FBB) household penetration in the country (2Q2024: 49%) and promotional activities.

The research house also noted there are earnings tailwinds from operating expense (opex) efficiencies.

It noted that despite the competitive landscape, regulatory pressure and economic challenges, TM’s opex (ex-depreciation) has been relatively steady over the past three years.

"We see continuing strong focus on cost shoring earnings, as the group navigates the keen competition on the retail front."

RHB also cited an undemanding valuation on TM, which is expected to deliver FY2024-2026F core earnings at a CAGR of 11.3%, supported by healthy growth in data and internet revenues, as well as cost discipline.

The counter is still trading at an undemanding valuation, at a 12% discount to its historical 10-year EV/Ebitda (earnings before interest, taxes, depreciation, and amortisation) mean.

It also noted that there is upside risk to dividend per share, given the group’s strong free cash flow and under-leveraged balance sheet (FY2024F net debt/Ebitda at 0.9x).

Key downside risks are intensifying FBB competition, weaker-than-expected earnings/dividends and regulatory setbacks.

TM's shares slipped five sen or 0.7% to RM6.68 during early trade, valuing the telco group at RM25.6 billion.