Telecommunications Monthly Review: November 2008

December 2, 2008 at 6:42 am Leave a comment

• Can TM sustain its dividends?
The market had doubts about TM’s ability to maintain its generous dividend policy when management was not forthcoming when questioned during its earnings call. Only upon noticing the steep decline in share
price did management clearly reiterate its dividend policy the following day. We examine the likelihood of TM failing to uphold its dividend policy going forward.
• TMI biting off more than it can chew?
TMI together with 2 Iranian partners are bidding for the third national mobile licence in Iran. If successful, we envision TMI further leveraging its already much stretched balance sheet due to the Idea acquisition and TM
debt. While the Iranian mobile market is attractive based on its relatively low penetration rate, we also believe the risks involved are quite substantial.
• TM 3QFY08 results
TM’s 3QFY08 results came in below expectations, as net profit came in lower than expected due mainly due to exceptional items. TM also announced its headline key performance indicators (KPIs) for FY09 and FY11.
• TMI 3QFY08 results
TMI’s 3QFY08 results were slightly below expectations mainly due to higher financing costs and losses incurred by Dialog and Aktel. On a positive note, TMI has refinanced the bulk of its short-term debt
obligations of RM10.45bn from FY09 to FY11/12.
• Global developments
Notable global developments were news that China may issue 3G licences soon, remarks that India’s mobile industry may consolidate in 3 years and news of deal hunting by the world’s two largest mobile operators.
• MAINTAIN NEUTRAL on the sector

Malaysia Corporate News

TM’S DIVIDEND POSER

Can TM sustain its generous dividend policy? During the earnings call on Nov 12, a question was posed regarding the sustainability of TM’s dividend policy. The concern is valid given that the company was facing high capex requirements for its high-speed broadband (HSBB) roll out and maintenance capex. When management was evasive in reaffirming its dividend policy, other than stating that excess cash would be returned to shareholders, investors hold down TM shares upon worries that TM will not uphold its dividend policy of RM700m or 90% of PATMI whichever is higher going forward. TM shares hit an intra-day historical low of RM2.54, but subsequently recovered after management issued a statement the following day that its dividend policy remained unchanged into FY09 and going forward. High capex a concern. TM is expected to spend RM2.3bn p.a. for the next 3 years on capex. The capex comprises of RM800m p.a. for the physical roll-out of the HSBB network and RM1.5bn p.a. for its existing businesses. With an estimated RM2bn annual operating cash flow going forward (financing costs and tax not yet accounted for), it is not surprising
doubts arose on the sustainability of its dividend policy.
RM4bn from TMI to last 6 years. If TM does indeed experience a shortfall in operating cash flows to pay dividends, we believe the RM4.0bn due from TMI can tide TM over for about 6 years until 2014. This is despite taking into account the RM2.4bn HSBB coinvestment by the government which would ease some of the strain on TM’s operating cash flow only from FY09 to FY11.

TMI EYES IRANIAN MARKET

Pre-qualified to bid for third national mobile licence. TMI together with 2 Iranian partners will submit a bid for the third national mobile licence in Iran, which includes a 2-year exclusivity for a 3G network, after being pre-qualified on Nov 28. On Nov 19, TMI together with Fanavari Moudj Khavar (“Fanamoj”) and Sarmayegozarie Atiyeh Saba (“Atiyeh”) had formed a consortium agreement to pre-qualify for the bid. Fanamoj is a high technology systems and solutions provider, while Atiyeh is an investment holding company. Gunning for a national presence. Winning the third national mobile licence will increase TMI’s presence in Iran despite its existing operations via a 49% stake in Mobile Telecommunications Company of Esfahan (MTCE). The licence held by MTCE only allows it to provide mobile services in the Esfahan province of Iran and limits MTCE’s total number of subscribers to 35,000. With such limitations, MTCE’s growth and earnings contribution is minimal. With a population of 73m in Iran and approximately only 38% mobile penetration as of Sept 2008, Iran appears to be a relatively attractive market with growth potential.
But capex will be heavy… Capex however is expected to be very heavy, going by the rapid expansion MTN IranCell (one of the two existing national mobile operators) 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 1.6x (including RM4.0bn due to TM).
… and risks abound. 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.
To reap returns only after 3 years? Cash flow from this venture is likely turn positive only after more than 3 years looking at how 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. MCI is the mobile arm of state-owned Telecommunications Company of Iran (TCI). With penetration rate having risen to 38% and the 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.

COMPANY RESULTS

T MK, Buy, TP: RM2.74. TM’s 9M08 results were dragged down by exceptional items comprised mainly of prior year volume commitment settlement (RM50.3m), disposal of Sotelgui (RM88.8m) and unrealised forex losses on its US$1.1bn bond (RM195.7m). Broadband subscriber growth maintained with net adds of 84k q-o-q to 1.55m subscribers while ARPU further improved RM2 q-o-q to RM96 (2Q08: RM94) resulting in 9M08
broadband revenue increasing to RM1.09bn (+25% y-o-y). However, voice revenue declined 8% y-o-y to RM2.74bn as fixed line subscribers continue to fall by 9k qoq to 4.31m. TM announced its headline key performance indicators (KPIs) for FY09 and FY11, setting revenue growth targets of 1%-2.5% and 2%-3% respectively. EBITDA margins are expected to come in at low to mid 30s as TM rolls out its HSBB services, expand its business process outsourcing operations and grow its ICT segment in the enterprise and government markets. Accordingly, we revised our EBITDA margins to c.33% (previously c.38%).

TI MK, Buy, TP: RM5.95. TMI’s 9M08 results were slightly below our and consensus estimates mainly due to higher financing costs (RM105m from TM loan and RM36m from Spice-Idea merger) and losses incurred by Dialog and Aktel. Celcom and XL both posted good sets of results on the back of strong subscriber growth while margins were relatively steady. Dialog slipped into the red for the first time mainly due to higher costs in a high inflationary environment (28%) and expansion of network infrastructure. Aktel’s losses widened due to reduction in tariff from competitive pressures and lower EBITDA margins of 24% (2Q08: 29%) due to higher A&P and network maintenance cost. TMI has addressed its short-term funding issue by securing a RM2bn domestic 3-year term loan at 5% to prepay TM while the RM6.5bn bridging loan for Idea’s acquisition will be
funded by a RM4.85bn domestic 3-year term loan. TM will therefore pay the remaining RM2bn due to TM in April 2009 in cash. Prepaying TM will save TMI in terms of financing costs as the interest rate charged by TM on the RM4bn due from TMI is 6.5%. Discussions are still ongoing to convert the balance of US$500m into a term loan.
Management has said that TMI is looking at all options including bonds, Islamic banking instruments and equity instruments to address its long term funding solution. TMI is expected to decide on the solution by 1Q09.

Different strokes as TM’s shares recover… TM’s share price recovered as investors grew more confident that TM will uphold its dividend policy going forward. The prepayment of half the RM4.0bn owing by TMI has also injected a heightened sense of assurance that dividends will be paid, even if profitability falls short in the near term.
… but TMI closes at historical low. TMI’s share price however continued to weaken to an all time historical low despite the company addressing its short-term funding issue. The company is already in an over-geared position with a debt/equity ratio of 1.6x, and news that it is seeking to expand its presence in Iran does not sit well with investors. TMI may need to gear up further to spend on licensing fees and capex should the company be successful in its bid for the third national mobile licence in Iran.

WIMAX

YTL to launch WiMAX next year… YTL e-Solutions Bhd (YTLE) is now expected to launch its WiMAX services nationwide next year. The company has missed its previous Aug 2008 target to roll out its services. This is unsurprising considering that there was a lack of news flow and development leading to Aug 2008.
… appoints Cisco as technology partner. To expedite the roll-out, YTLE has announced the appointment of Cisco Services Malaysia Sdn Bhd this month as a technology partner to help establish the WiMAX core network in Peninsular Malaysia. Under the partnership, Cisco will build and integrate YTLE’s WiMAX core network, including the Internet Protocol core, operating support system, billing system, proactive network operating centre and interoperability testing labs.

Global News

China to kick-start 3G soon. According to an industry regulator, China is believed to be close to granting approval to mobile operators to start offering 3G services in the country. Xi Guohua, vice minister for industry and information technology said that the time is ripe in principle for issuing 3G licences. The remarks confirm that Beijing has re-started its stalled reforms of the telecom sector and raised expectations of industry executives on the potential of the Chinese mobile market, the world’s biggest.
India’s mobile industry to consolidate? India’s mobile industry is set to consolidate in 3 years, forcing at least half of the industry’s 12 operators to sell or go out of business, according to Manoj Kohli, CEO of Bharti Airtel. India’s mobile market is the world’s second largest market with a penetration rate of only 27%. Competition is so stiff that India has the world’s lowest tariffs and revenue per user. Thus, TMI’s recent strategic positioning to merge its Indian unit, Spice with Idea Celluar (7th largest mobile operator by number of subscribers) makes sense operationally though TMI overpaid in the transaction. Spice with only 2 circles
in operations and no profits to show for would have eventually gone out of business. Mobile operators seek deals. Two of the world’s largest wireless operators, China Mobile and Bharti Airtel, are hunting for global acquisitions, as they seek to take advantage of the global financial crisis to use their strong cash positions, low debt and the relative absence of aggressive rival western bidders to snap up cheap foreign assets. While the pair are still expanding rapidly in their home markets, they are keen to diversify and build a platform for
growth once their domestic markets begin to slow in the coming years. China Mobile last year made its first foreign acquisition by purchasing Pakistan’s Paktel for US$460m. Earlier this year, Bharti was in talks to buy South Africa-based MTN in a deal that was at one stage estimated at US$50bn.

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