• Keep BUY and SGD3.25 TP (SOP), 26% upside with c.6% FY25F dividend yield. We view Singtel’s latest data centre (DC) foray in Malaysia positively. The JV completes its regional DC footprint, with scale economies to drive longer- term growth for its Digital InfraCo business, which is a key growth engine. Capital management upside, ROIC accretion and price repair in key markets are key investment theses and share price catalysts. Our TP incorporates a 4% ESG premium given Singtel’s 3.3 ESG score vs the 3.1 country median.

• Singtel has entered into a JV with Telekom Malaysia (TM) for the building of a new hyperscale DC campus at Iskandar Puteri, Johor, which will see indirect subsidiary Nxera MY (Nxera) and TM co-investing in a JVCo (ST Dynamo DC), with the former holding a 49% stake. Both have agreed to commit up to MYR1.15bn as initial equity over a period of five years, with Nxera’s commitment being MYR564m. TM will invest the remaining MYR587m. The committed equity funding is subject to change, depending on the approved business plan at any point in time. ST Dynamo DC had earlier entered into a sale & purchase agreement to acquire a plot of land measuring 168,959sq m (~41 acres) at Pulai District for the DC development from Iskandar Investment for MYR178.2m. The exercise is pending TM’s shareholder approval and subject to various regulatory/state approvals, including the variation of the land status, with expected completion in 2H24.

• Third DC partnership; completes ASEAN DC footprint. The JV confirms earlier market talks and marks Singtel’s maiden entry into the Malaysian DC space via Nxera (part of Digital InfraCo, a key/new growth engine). It previously entered into similar JVs in Indonesia with Telkom Indonesia (TLKM IJ, BUY, TP: IDR4,780) and Medco Power for the building of a 51MW DC in Batam Island, and Thailand with Advanced Info Services (ADVANC TB, BUY, TP: THB256) for a 40MW DC. With the Malaysia DC, its overall DC capacity is set to grow from 62MW in Singapore now to >250MW region-wide over the next three years.

• The DC entails the development of an initial 68MW capacity (expandable to 200MW). Slated for completion in 2026 (FY27), it will be equipped with high power density and liquid cooling technology with large computing capabilities to support artificial intelligence workloads. We see the DC pre-empting capacity constraints in Singapore and meeting the overflow of inventory from the island state. The JV is timely, considering the development of the Singapore-Johor Special Economic Zone where DCs are viewed as core economic enablers. The DC is strategically located within major sub-sea cable links and is adjacent to Tenaga Nasional’s (TNB MK, BUY, TP: MYR16.10) new high voltage transmission line. We estimate the peak funding requirement at >MYR3bn, which could be defrayed from the proceeds raised from the sale of its 20% stake in Nxera to KKR last September for SGD1.1bn.

Source: RHB Research - 19 Jun 2024