Riding On Data Centre Demand To Drive Shareholders’ Return
Demand for data centres in Malaysia is expected to outstrip supply in the next three years and we expect TIME to capitalise on this trend. We see pipeline for two new DCs by 2025: a) Phase 2 AIMS @ Cyberjaya, and b) EPF Changkat Raja Chulan. Taken together, we estimate TIME DC is worth RM4b (or 45% of market capitalisation). Maintain BUY. Target price: RM5.20.
• Data centres in Malaysia remain undersupplied… A recent meeting reaffirmed our BUY conviction on the company, underpined by robust three-year earnings CAGR of 12% (vs musted sector growth). We gathered that demand for data centres (DC) continues to outstrip supply in Malaysia – at least in the next 3-4 years. As such, TIME dotCom (TIME) is poised to benefit as it continues to invest in DCs in Cyberjaya and Kuala Lumpur – where the yield is higher due to its location (in the centre of business district).
• …and TIME is poised to capitalise on this trend. A recent site visit to AIMS @ Cyberjaya Phase 1 indicated that take-up rate is meeting internal targets one year after commercial operations (Jul 21). Stepping foward, we expect TIME to build another 2 DCs to capture this growth: a) AIMS @ Cyberjaya Phase 2 – similar in size to Phase 1, and b) a new DC at EPF Changkat Raja Chulan, central Kuala Lumpur. To recap, TIME proposed to purchase EPF’s Changkat Raja Chulan building in Jan 22 for RM62m.
• Blue-sky scenario: DC assets worth RM4b in three years. As recent as a month ago, the media reported that US-based investors DigitalBridge Group Inc., I Squared Capital-owned BDx and Equinix Inc. are among potential suitors for TIME’s AIMS DC. A potential deal for Aims could raise US$500m-600m. This values TIMES’s DC at an estimated 30x historical earnings vs group valuation of 20x 2022F earnings. A potential partial stake sale, albeit our own conjecture as TIME does not comment on market speculation, may help crystallise the value of TIME’s inherent and growing DC assets.
• Key re-rating catalysts include monetisation of DC assets. We estimate TIME’s 45MW DC assets (including AIMS @ Cyberjaya Phase 2 and EPF building) could be worth RM4b by 2025 – 45% of current market capitalisation. We estimate that DC accounts for 20% of 2021 earnings and will ramp up to > 30% of group earnings by 2025. This implies ample room for TIME to re-rate.
• Regional associates: Expansion continues. Apart from its Cyberjaya data centre, TIME aims to further expand its data centre footprint regionally. This will help to further strengthen its regional (ASEAN) connection. Currently, TIME has overseas DC presence in Thailand (NLA of about 5,500sf) while Vietnam DC is operated via associate CMC. This is in line with TIME’s near-term focus to re-energise regional DC to drive revenue growth.
• 2022 outlook. We expect a stronger 2H22 earnings base. For full-year 2022, we project an 8% yoy net profit growth despite the impact of one-off prosperity tax. This is driven by a 16% yoy revenue expansion, contributed by: a) higher fibre broadband sign-ups given a wider fibre footprint, b) AIMS @ Cyberjaya Phase 1 contribution, and c) healthy demand from the enterprise and OTT customers with accelerated cloud adoption. This would be partly offset by margin compression as TIME has guided for a relatively high investment spending on data centre expansion in 2022 that would see higher cost associated with it. Capex guidance is RM500m vs RM300m in 2021.
• No change to earnings.
• We have captured AIMS @Cyberjaya Phase 2 in our 2024 revenue projections – where DC revenue is expected to grow up 33% yoy. Our key assumptions are: a) 60,000sf of DC space, b) launch in end-23, and c) utilisation rate of 90% in 2024.
• Maintain BUY with a DCF-based target price of RM5.20 (WACC: 7%, terminal growth:
4%). At our target price, the stock will trade at 12x 2022 EV/EBITDA, +0.5 SD from mean.
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• Key re-rating catalysts include: a) the rollout of Phase 2 DC in Cyberjaya, b) faster-than-expected subscriber growth, c) stronger-than-expected ARPU uplift, d) earnings-accretive M&As, and e) the rollout of 5G infrastructure in Malaysia.