Telekom Malaysia: Telecommunications

THE COMPANY: Telekom Malaysia (TM) is the largest integrated communications solutions provider in Malaysia. TM’s core businesses are providing communication services and solutions in internet, multimedia, and data and fixed line. Khazanah is the major shareholder, with a 28% stake, while the government-linked investment companies Employee Provident Fund and Permodalan Nasional hold 13% and 10%, respectively. Since signing a private-public partnership (PPP) with the government to roll out high-speed broadband (HSBB) in September of 2008, TM has seen an encouraging subscription rate for its HSBB services. The PPP stipulates that TM will offer open access to companies seeking to use its HSBB infrastructure to offer their own products and services. Maxis, Celcom and Green Packet have signed wholesale HSBB access agreements with TM.

The HSBB service, launched in March of 2010, has a subscription base of 440,000 out of the 1.2m premises passed with fibre. This translates into a take-up rate of 36% – among the highest in South-east Asia. TM’s foray into broadband began in 2001 with Streamyx, its offering on broadband for the mass population. Leveraging on Streamyx and UniFi, TM played an integral role in achieving 50% household broadband penetration by 2010, under the National Broadband Initiative. Household broadband penetration has now risen to about 63%. TM reported operating revenue in the second quarter of 2012 increased by 1.7% quarter-on-quarter and 8.6% year-on-year to some RM2.4bn ($780.7m). Also for the second quarter of 2012, its earnings before interest, taxes, depreciation and amortisation grew by 1.9% quarter-on-quarter, and by 6.8% year-on-year to RM797m ($257.1m).

DEVELOPMENT STRATEGY: Among TM’s key priorities in the short term is to continue building on UniFi’s momentum before competition intensifies. TM expects 10-20% of its market share to go to other players in the medium term, but believes the market is big enough for all players. So far, TM’s UniFi momentum appeared somewhat intact in the second quarter of 2012 despite aggressive pricing by Maxis since 2011, and Green Packet launching its own fibre plans in March 2012. Celcom has yet to launch its own fibre plans, but aims to focus mainly on enterprise and corporate customers as a retention strategy. TM added 68,000 UniFi subscribers in the second quarter of 2012 (first quarter: 79,000). This implies a run rate of 22,000 per month, which is slightly lower than the first quarter’s 26,000. It appears that UniFi net adds may have peaked, but this is not too surprising as TM would have initially addressed areas which had pent-up demand for high-speed internet.

Going forward, to maintain growth in its subscriber base, TM will roll out HSBB to new residential areas outside of the Klang Valley, Johor Baru and Penang. New areas that TM will be expanding HSBB to on a demand-driven basis include Terengganu and Malacca. Management has revised its year-end UniFi subscriber target to 500,000 from 400,000. The new target does not appear overly conservative in light of stiffer competition. Assuming TM maintains its monthly net adds momentum for the rest of the year, it could achieve 508,000 UniFi subscribers (or a 39% take-up rate).

Capital management exercises will be a key area that investors will continue to pay attention to. TM declared a RM1bn ($322.6m), 30 sen per share, capital distribution upon announcing its fourth-quarter fiscal year (FY) 2011 results in February of 2012. Given its sizeable cash balance of RM2.7bn ($871m), 75 sen per share, and flattish capex needs, we believe TM has the ability to support a similar kind of capital distribution for FY 2012. The still strong momentum of UniFi, despite the increased presence of competitors, leads us to believe TM will likely exceed its FY 2012 key performance indicators (KPIs). Revenue growth in the first half of FY 2012 was strong at 9.7%, but management maintains its 2012 KPI of 5% revenue growth. TM has kept costs under control, which suggests strong FY 2012 earnings growth potential.