Telecommunications Weekly Review: 17th – 23rd November 2008
Weekly Review: 17th – 23rd November
• Higher risks and debt weigh on TMI’s valuations
We have lowered our DCF SOP valuation for TMI from RM7.80 to RM5.95, taking into account higher risks and a burgeoning debt level. Except for Excelcomindo (XL), most of TMI’s overseas mobile operations have reported lower earnings despite higher revenue growth. This is mainly due to contraction in EBITDA margins, as a result of more intense competition and inflationary risks. While inflationary risks have become less of a threat as global commodities prices drop, earnings growth may be tempered by a global economic slowdown.
• Is TMI’s prospective venture into Iran a good idea?
TMI announced this week it is bidding together with 2 Iranian partners for the third national mobile licence in Iran. If successful, an operating company with a paid-up capital of at least 50% of the upfront licence fee
estimated at €150m (RM684m) will be set up. TMI will hold 49%, while its Iranian partners will hold a combined 51% in the operating company. The licence is a national mobile licence for both 2G and 3G for a duration of 15 years. If TMI wins the bid, it will have an edge over its competitors MCI and MTN IranCell, the only other two existing national mobile operators who do not have a 3G mobile licence. With a population of 73m in Iran and approximately only 56% mobile penetration as of Sept 2008, Iran appears to be a relatively attractive market with growth potential. Capex however is expected to be very heavy, going by the rapid
expansion IranCell underwent over the past 3 years since being awarded its license in Nov 2005. We would similarly expect TMI’s Iranian venture to be capex heavy during the initial years to build its national footprint and network capacity. How the capex will be funded is unclear. TMI’s current gearing level is already quite high with a debt/equity ratio of 1.5x (including RM4.0bn due to TM).
Operating in Iran is not without its issues and risks. While IranCell experienced spectacular growth due to aggressive subscriber acquisition campaigns and pricing, it is now facing congestion issues on its network.
Difficulty in securing sites has hampered efforts to roll-out the network and add capacity.
Cash flow is likely to be positive only after more than 3 years. IranCell turned in its first profits only in 1HFY08, approximately 3 years after it first began operations when there was only one other national competitor, MCI which is the mobile arm of state-owned Telecommunications Company of Iran (TCI). With penetration rate having risen to 56% and incumbents now in a more entrenched position (IranCell currently has 57% nationwide coverage), it is unlikely that TMI’s venture into Iran can turn in a profit in the short space of time that MTN achieved with IranCell.
• MAINTAIN NEUTRAL on the sector
Quiet week. Share prices were largely flat during the week due to lack of news. Shares are
expected to continue trading in a tight range as the sector lacks catalysts.
Entry filed under: Business, Finance, Stock Market. Tags: 17th – 23rd November 2008, 2008, Capex, Cash flow, Excelcomindo, MCI, MTN IranCell, November, Share prices, telecommunications, TMI, weekly review.