Sugar & Spice For Telekom Malaysia

Next to Tenaga, Telekom Malaysia has also been very stale as well for most of the year. However, there are sufficient signs that TM is primed a good run very soon. The lofty valuations enjoyed by DIGI and Maxis totally bypassed TM. As the first 6 months draws to a close, many equity strategists are putting out reports for the second half of 2007. The consensus is, things are still great for most emerging markets. Many of them still have bucket loads of recommedations on stocks with at least 20% upside. Most favoured markets include Brazil, South Korea, Malaysia and Thailand. Sectors favoured include energy, industrial and telecoms. Markets most are avoiding for the rest of the year were China and Indian markets.

TM looks a safe bet below RM11.00. The supposed merger of TM's 49% entity, Spice Communications, with Idea Cellular in India have been dismissed. TM should be in the limelight with Spice Communications' IPO due in a couple of weeks time. Watch it fly! Following the IPO, TM will end up with a 39% stake while the Modi group will have 41%. Growth for Spice will come from the Karnataka and Punjab areas: collectively they have an 80m population.

To compare, Maxis' Aircel operates in 9 areas while Spice only has 2. Aircel now has a subscriber base of 5.5m while Spice has 2.7m. Outlook still very good for both Indian companies as penetration rate in India is just 13% compared to Malaysia's 75% rate.

TM's overseas contribution to revenue is around 28% and should rise further in the coming quarters. The stock has underperformed KLCI by -22% over the last 12 months. Dividend yield around 3.8%-4.0%. Celcom will be making a capital repayment exercise to TM worth RM730m, finally.

The kicker will be Spice's valuation. When TM bought its stake in Spice, the company was valued at US$365m in March 2006. Based on the staggering IPO price of 48 rupees (110x FY2008 earnings, or 8x EV/Ebitda): the valuation of Spice is now US$750m. This will result in an exceptional gain of RM391m for TM. Though a one-off item, its still significant.

TM should move higher after being ignored for so long. The valuations now are undemanding. Looking for RM12.50-RM13.00 as fair value targets.