Saturday January 14, 2012

Reversal of fortunes

By B.K. SIDHU
bksidhu@thestar.com.my

Telekom Malaysia has transformed from a dinosaur-like corporation into a speed merchant in the field of telecommunications and WiFi in a strong reversal.

TELEKOM Malaysia Bhd (TM) officials were in Singapore recently for the OSK/DMC Asean Corporate day.

They spoke on the future of TM to over 20 investors and fund managers. TM is OSK's top telecoms pick and TM was among the three dozen companies from Malaysia, Singapore, Indonesia and Hong Kong being showcased at the event.

OSK's rationale for picking TM was because of the incumbent's promising growth in data business and good capital management strategy, among other things. These roadshows are nothing unique as many research houses do the same so that investors and fund managers can get first-hand information from the companies themselves before making their investment decisions.

The TM of today has seen a reversal of its fortunes. Once upon a time it was a favourite but when it experienced a staggering decline in its voice business, funds began trimming their exposure.

Ever since the data boom and the need for more fibre in the ground, there is a fresh appeal for this stock. Today TM has managed to wire up more than 1.17 million premises in the country with high-speed fibre.

High-speed broadband (HSBB) was launched in March 2010 and its retail offering, UniFi, in June the same year. By the end of 2012, TM will have completed the three-year pact it has with the Government to wire up 1.3 million premises. It has worked on a supply model for the RM11.3bil HSBB in which the Government gave it RM2.4bil. But the strategy to expand beyond the 95 areas would have to be demand driven, says TM group chief executive officer Datuk Seri Zamzamzairani Md Isa.

Despite initial hiccups, TM's UniFi product has seen a commendable take-up rate of 20.7% and while prospects look promising, investors will likely consider such matters like legacy issues and delivery ability.

TM has increased its UniFi subscribers from 33,000 at the end of 2010 to over 220,000 by the end of 2011.

Perception

Market perception is that TM still has legacy issues and that will continue to be in its way, says an analyst with a foreign-based brokerage.

“Market also expects it to deliver better quality service, the kind that customers expect and shareholders want higher dividends and better cashflow generation,'' he adds.

To be fair, the former “dinosaur” is making changes from the way it operates to the way it delivers services. The way it has packaged UniFi is a clear distinction from the past,'' says an industry source.

Zamzamzairani says the telco is in a transformation mode and every aspect of the business is being reviewed and fine-tuned to meet future challenges.

TM's share price was one of the top performer last year, outperforming the market by 59%. On Friday it closed at RM4.83.

“Thank you for the stock pick but we still have a lot to do and every time the share price goes up, I feel my shoulders are heavier,'' Zamzamzairani says in an interview.

He adds that “we are concerned about the performance of the company and the ability to deliver our headline KPIs.''

According to Bloomberg data, there are equal (eleven each) numbers of research houses calling a “buy” and “hold” on the stock and nine have a “sell” call. The target price stated is RM4.54. There could be a review after the company announces its full-year 2011 results on Feb 28.

Its foreign shareholding as at end 2011 has reached a high of 21.39%, which is a level last seen in 2008.

Analysts are already expecting a possible cash return announcement on Feb 28. Zamzamzairani did not give any clues on that.

Kenanga Research in its research note says TM “has reiterated its commitment on returning excess cash to reward shareholders should there be no additional capex required by the company.''

TM had also disposed its 92.36 million Axiata shares for RM468mil in late July last year and the house says that it “translates into a potential 13.1 sen per share special dividend. Should TM decide to reward shareholders by declaring 50% of its retained earnings (RM2.5bil as at the third quarter 2011), this could translate to a potential 36.0 sen/share special dividend'' while OSK believes it will be 32 sen.

Whatever the figure, OSK expects TM to report RM542mil in net profit and RM9.3bil revenues for the 2011 full year. Kenanga's estimates is RM577mil and RM9bil respectively. OSK expects overall EBITDA (earnings before interest, taxes, depreciation, and amortisation) margins for 2011 to trend around the mid-30s.

For the current year, OSK and Kenanga expect RM761mil and RM650mil in net profit and RM10bil and RM9.4bil in revenue respectively.

Run rate

There is also the perception that TM has rolled out its UniFi to too many premises whereas its take-up rate for the service is still low, although 20% is commendable for a new service.

Some say it will take years before TM can get all the remaining 1.1 million premises passed users to subscribe to the service, but others believe it may take two to three years.

“It is an issue of experience. If people like the new experience, they will tell others. Internet has become a lifestyle thing, so the adoption of broadband will be faster,'' says an industry observer.

Thus far, it has rolled out UniFi to 78 exchanges out of the 95 exchanges and to 1.17 million premises out of the 1.3 million premises. When it began, TM could only handle one installation per day. Now it has 600 teams nationwide and each team can do three installations a day. That works out to a run rate of an average of 1,000 installations a day and about 20,000 installations a month.

At the end of 2010, TM only had 33,000 UniFi subscribers, but at the end of 2011, it has surpassed 220,000, Zamzamzairani says. Though Kenanga believes it is about 237,000 users.

His target for 2012 is 400,000. But he says “we are also sure we can do better.''

Zamzamzairani expects the run rate of 20,000 new subscribers per month to continue into 2012, but warns that “as we move to new areas it becomes harder compared to the earlier areas.''

The 95 areas designated to get HSBB before other areas are based on the premise that the service will be available in areas with high economic impact to give the best rate of return for TM's investment, Zamzamzairani says.

But when can TM break even for this venture?

“Of course, the topline will grow but we need to get more subscribers as we need margins to roll out more. Over time we would increase speed offerings beyond the 20Mbps and we hope to achieve 50% penetration of premises passed in two to three years. It will be one to two years before we can get profits,'' he adds.

Before UniFi, there was Streamyx which will continue though more and more of Streamyx users are migrating to UniFi.

“Quite surprising, the migration is 40% from Streamyx and 60% are new users plus those who had left Streamyx previously and are coming back to UniFi. We cannot consider those who migrate from Streamyx to UniFi as a loss to Streamyx.

“The focus is really to grow broadband, not one service or the other. There is an impact of migration on Streamyx, especially in UniFi areas but that is alright as we can now offer an enhanced system,'' he says when asked if Streamyx will lose out since UniFi is there.

Though TM had made dramatic progress with UniFi, TMand its fibre rival Time dotCom Bhd (TDC) did make some wrong bets on the choice of areas to roll out the high speed fibre.

They thought going to places where property prices were highest, such as Bangsar, would see high take-up rate but were disappointed as the take-up rate was lower than many new growth areas.

“We have stopped looking at areas where the property prices are high and the focus now is on age and lifestyle,'' says TDC CEO Afzal Abdul Rahim.

Zamzamzairani adds that “we have to continue to build but will move away from a supply driven model and any new roll out will be demand driven. We will have partnerships with property developers to roll out in new areas. It now appears to be a good marketing tool for them as people expect new homes to have Internet connections.''

Rolling out UniFi to new areas is the plan, but increasingly TM needs to keep its users longer on its network to increase its average revenue per user (ARPUs).

Nomadic user

“Once our customer walks out of the premises, he is no longer ours but with us putting in more hotspots for our WiFi service, we would be able to retain him longer. It is an opportunity, a segment of the market for us to tap the nomadic user,'' says Zamzamzairani.

Now TM has 17,000 hotspots in the country, but the plan is to increase the numbers but he did not say how many more though shopping complex and malls are the target areas.

The new city council ruling that food and beverage premises occupying more than 120 sq m need to have WiFi also provides some growth opportunity for TM's broadband product, even though Kenanga Research believes the impact is minimal.

It would also at some point get into the cellular sector, as that is its missing link in its suite of services. But it will be on a mobile virtual network operator (MNVO) concept.

“We are always looking to enhance our fixed line broadband offering. MNVO is one arrangement that can complete our suite of services,'' says Zamzamzairani.

For the consumer it is about seamless connectivity wherever he is, and that is what Zamzamzairani says is “true convergence.''

“The era of true convergence is here, previously we were just talking about convergence. It is happening now. Customers do not care about how you bring the service to them, so long as they can access the same content.

“The impact is that the pie will grow quickly and each player can benefit from it. Some players will be complementing, while others will be competing. We are also rolling out in our hotspots so that we can keep the customers for a long period,'' he adds.

There are other opportunity areas for TM to grow its revenues and he cited cloud computing and data centres, but did not elaborate.

There are also efforts to push users to take up the higher-value packages in a bid to raise its ARPUs.

Asked on the ARPU trends, Zamzamzairani says “there is a decline as 90% are on the front-end of the packages. They go for high speed and complement with content. But ARPUs are still strong at RM78 for Streamyx and the blended (households and business) ARPU for UniFi is RM184.''

Kenanga says UniFi's ARPU will continue to be under pressure as a majority, or 85%, of its current subscribers are opting for the lower-end VIP5 package which is RM149 per month, with the higher-end subscribers accounting for just 6%.

TM offers three packages for UniFi VIP5 is at RM149 per month for 5Mbps download and upload, RM199 per month for 10Mbps and RM249 per month for 20Mbps.

However, going forward, Kenaga says TM is planning to take several measures such as to increase commission for re-sellers, undertake advertising and promotion activities and IPTV awareness to lift its ARPU.

Next challenge

The next challenge for TM is pleasing its customers and that is its most difficult task.

With Streamyx it had lost a lot of subscribers as there were many complaints. However, that is not the case with UniFi. Though some of its subscribers have returned, it needs to do more to get the legacy issues sorted out.

“Gradually everything is being addressed as taming a dinosaur can be challenging,'' says an industry source.

The need to reshape itself becomes more critical because TM has to share its HSBB with other players such as Maxis Bhd, Celcom Axiata Bhd and Packet One Networks (M) Sdn Bhd. “There is competition but it has not heightened to the stage where prices of data services have come down or service quality is being uplifted. It will come to that point, but hopefully the players will not work like a cartel and control the prices,'' says an industry expert.

To stay above the pack in the fibre world, TM has been in transformation mode for a while now. Currently the target is to improve its customer experience, as that will differentiate one player from the other.

It has adopted the “cool” concept which focuses on customer-centricity, one company mindset, operational excellence, and leadership.

“The transformation covers all aspects of the business,” he adds.

The possibilities

TM's strategy is right after a long time and after many wrongs. Today it is growing faster in revenue than even Maxis Bhd. It has done something right and the momentum should continue, says an analyst with a foreign-based research house.

“People will complain about the service and slow installation, but most people will not say how much it has improved and how fast UniFi is. If there is more fibre in the ground put in by other players, then we can expect competition but for now that is not the case,'' he adds.

Whatever it is, investors will have their own views whether to bet on this stock or not.

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Business

Saturday January 14, 2012

Reversal of fortunes

By B.K. SIDHU bksidhu@thestar.com.my

By B.K. SIDHU
bksidhu@thestar.com.my