The Malaysia Digital Economy Blueprint (MyDigital Blueprint) was launched in February 2021, aiming to accelerate the country’s transformation into a highincome nation and technologically-advanced economy by 2030. As part of the strategy under the MyDigital Blueprint, the Malaysian government has given approvals for Microsoft, Google, Amazon and Telekom Malaysia (TM) to invest in hyperscale data centres. We expect more new infrastructure (i.e internet exchange points, cable landing stations and fibre optic cables) to be developed to cater for the expanding IT load. TM is seen as one of the prime beneficiaries of this booming market, as major cloud and internet companies would also demand for services connecting data centres with terrestrial as well as global subsea cable networks. We raise our FY25-26F earnings forecasts by 4-7% to capture additional contribution from TM Global and TM One. Also, we estimate that TM’s partnership with Singtel to build and operate a 64MW greenfield data centre may potentially lead to an earnings uplift of ~24% at steady state. Valuing this data centre at RM8.1bn (effective stake of 51%), we raise our TP for TM to RM8.80. Upgrade to Outperform.

• Booming data centre industry. Malaysia has attracted global techcompanies pledging to pour in billions of investment to set up data centrefacilities in the Klang Valley and Johor. This trend is driven by digitalrevolution with the world rapidly gravitating to cloud services, generativeartificial intelligence and machine learning. Supported by a confluence offactors such as favourable government initiatives, abundance of resources(land, power and water) and advanced infrastructure, Malaysia’s fortune asan untapped potential is fast-changing. Coupled with its proximity toSingapore, a new symbiotic relationship between Malaysia and Singaporeis likely to turn Malaysia into the next epicentre of data centres in this region.So far, the top 3 tech giants have collectively committed to investUSD10.2bn in Malaysia.

• Malaysia benefitting from slower growth in Singapore. Singaporeannounced a moratorium on new data centres between 2019 and 2022 asthe proliferation of these energy-guzzling facilities were draining a sizeableamount of Singapore’s resources i.e. land, electricity and water. Malaysia(particularly Johor) is benefitting from the spillover effect of insatiable globaldemand for IT load capacity, given its proximity to Singapore, which is aleading network hub connecting economies of Southeast Asia and beyond.Being the most connected country in Asean, Singapore is a landingdestination for 25 operating subsea cables and has 14 more projects in thepipeline. The city-state has also announced its plan to double the number ofcable landings within the next decade. Comparatively, Malaysia has 25cables connected through six landing stations.

• Demand for supporting services to increase. As there is no cable landingstation in southern Johor, we believe TM could possibly add new station tosupport its existing stations, as well as participating in consortiums to laymore subsea cables to connect Malaysia to the rest of the world. Althoughwe believe TM’s joint venture (JV) with Singtel is not likely to be earningsaccretive within the next 3 years but beyond FY26F, we believe its 51%stake in the greenfield data centre could result in ~24% earnings uplift. Werevise up our FY25-26F earnings forecasts by 4-7% to account for moreprovision of services relating to managed wavelength for the hyperscalersas well as higher IRU value for domestic and international connectivity. Whileearnings impact is limited in the near term, we are bullish on the value of theupcoming hyperscale data centre JV. Based on our estimate, a steady-statevaluation of the 64MW data centre could be between RM12-20bn,depending on the margin that it could achieve (Table 1 & 2). In our opinion,EBITDA margin of 45% and a PER of 20x are reasonable.

Source: PublicInvest Research - 19 Jul 2024