Telecommunications Monthly Review: December 2008

January 7, 2009 at 8:14 am Leave a comment

· Can we still expect special dividends from DiGi?
Concerns arose surrounding the sustainability of DiGi’s dividend payouts, in particular its special dividends, when the company announced it was planning higher capex to roll-out 3G services and would finance part of the capex with borrowings. We believe this should not be too much of a
concern, as typically DiGi has spent less than its capex guidance, and should be able to maintain its aggressive dividend policy given its strong cash flow and under-geared balance sheet.
· TMI better off privatised?
With its share price near historical lows, huge debt burden on its balance sheet and high interest costs going forward, we believe it may not be too far fetched to suggest Khazanah is better off privatising TMI. TMI’s current situation is in many ways similar to Maxis’ privatisation back in 2007.
Privatising TMI now with the view of relisting later when earnings are more stable may be a viable option given current depressed valuations.
· Tune Talk the latest to enter MVNO market
Tune Talk has joined the ranks of Merchantrade, Redtone, and U Mobile in becoming the latest MVNO to enter the highly competitive mobile market with Celcom as a partner. Despite being a niche player, MVNOs have generally not been very successful elsewhere in the world, and we believe the situation should be no different here. Without a mobile network, MVNOs are simply at a core disadvantage against mobile operators who have spent significant amounts on capex to build and establish their networks.
· WiMAX still underachieving
Green Packet has been the only WiMAX licence holder to have rolled out services so far. The other WiMAX licence holders have delayed their roll outs and in the process missing the deadline set by the government to offer the service to 25% of the population in their service areas by end
2008 or see their licence revoked. However, the government has yet to take any action against those that have missed the deadline.
· Global developments
Notable global developments were news that Richard Li and China Unicom, PCCW’s two largest shareholders lifting their offer by 7.1% to US$2.2bn, or HK$4.50 a share in a bid to privatise PCCW. Meanwhile, Qatar Telecom is expected to bid for a majority stake of up to 65% after the Indonesian government withdrew conditions on a tender offer.
· MAINTAIN NEUTRAL on the sector


Can DiGi continue to pay out special dividends? Some concerns on DiGi’s aggressive dividend payouts, in particular its special dividends, have arisen as the company will go to the debt market next year to get some funding for its capex to roll out 3G services in the region of RM1.1bn to RM1.3bn next year. However, we believe DiGi still has the capacity to maintain its special dividends but with flattish growth, given its strong operating cash flow, relatively decent profitability growth and that only a marginal increase in capex is required to roll out 3G services.
Capex expected to be on lower end of guidance. We expect DiGi to spend about RM1.1bn capex in 2009, which is at the lower end of its guidance. This should be the more likely scenario as prudence is required in view of a deteriorating macro economic environment. In addition, DiGi has historically spent less than its guidance. Essentially, we believe DiGi will spend only an additional RM170m capex in 2009, given that capex spending in 2008 was RM930m. Cash reserves are still sizeable at RM512m as at end-Sept.
Cash flow remains strong… We estimate DiGi to generate about RM1.95bn in operating cash flow in 2009. Assuming DiGi maintains its FY08 dividend payout into 2009, DiGi will pay out RM1.47bn in net dividends. With 2009 capex at RM1.1bn, DiGi will be outlaying RM2.57bn in cash against its RM1.95bn in operating cash flow. To meet its dividend commitments and capex, DiGi will need to borrow RM620m to cover the shortfall.
… while balance sheet is under-geared. Assuming all else constant, DiGi’s debt will rise by an additional RM1.86bn to RM2.06bn to continue paying special dividends for the next 3 years. This will bring its gearing ratio from 0.1x to c.0.6x in FY11 which is still manageable for a company with strong cash flow generating ability. DiGi’s net gearing ratio will likely be considerably lower as it cash reserves grow going forward. In sum, DiGi should be capable of gearing up to optimize its balance sheet to meet its capex requirements for its 3G roll-out and still maintain its special dividends going forward.


Share price has seen better days. TMI’s share price has certainly seen better days, as it is only worth barely almost half of its reference price of RM7.85 since the demerger in April 2008. Since the demerger, TMI has not really made all the right moves.
First, it made a very expensive acquisition in Idea Cellular of India as part of a merger with Spice. TMI then had to gear up substantially to finance the aforesaid acquisition. Now it is even looking into expanding in Iran despite its other operations in Sri Lanka and Bangladesh bleeding red ink, and its balance sheet is highly geared at 1.5x. This begs the question of whether is TMI better off privatised?
Similar circumstances to Maxis’ privatisation. This is not a far fetched scenario, if we look at the reasons given by Binariang in taking Maxis private back in May 2007. Back then, Maxis was undergoing a rapid expansion in India and Indonesia, which required substantial capex resulting in increased gearing. Had Maxis not been taken private, not only would have shareholders faced increased earnings volatility, they might have to swallow lower dividend payouts due to higher borrowing costs. Taking Maxis private accorded Binariang greater flexibility to manage Maxis and re-list when earnings are “stable” again.
But at what price? Pricing would be important if any privatisation exercise intends to be successful. Based on the share price on December 15 when we published the note, we believe a 20% premium (similar to Maxis) or RM4.18 would be insufficient, as many shareholders would still be facing capital losses considering the YTD VWAP since TMI began trading is RM5.90. However, if the offer price were RM5.90, that would be more than fair as it would be priced at EV/EBITDA ratio of 9.0x, similar to 9.8x in Maxis’ privatisation exercise when the stock market was more buoyant. At RM5.90, Khazanah would need RM12.3bn (instead of RM7.2bn at RM4.18) to buy out the remaining 44.5% equity stake.


Celcom enters into agreement with Tune Talk… Celcom, a wholly owned subsidiary of TMI, entered into a Subscription Agreement and Shareholders’ Agreement with Tune Talk, whereby Celcom will subscribe for 2,625,000 ordinary shares of RM1.00 each of the enlarged issued and paid-up share capital of Tune Talk for a cash consideration of RM2,625,000.
… with a call option attached. In addition, Celcom will have a call option of 16% of the issued and paid-up share capital of Tune Talk exercisable after 3 years from commercial launch or upon Tune Talk achieving 1.5m active subscribers continuously for 3 months, whichever is earlier. The price of the call option depends on Tune Talk’s profitability, and will be based on multiples of the audited EPS or NTA of Tune Talk.
About Tune Talk. Tune Talk plans to offer mobile communications services as a mobile virtual network operator (MVNO). Tune Talk has an authorised share capital of RM5,000,000 comprising 5,000,000 ordinary shares of RM1,00 each of which 2,650,800 shares have been issued and paid-up. Therefore, Celcom will presumably have 49.8% control of Tune Talk. Tune Talk’s majority shareholder is Tune Ventures, which is owned by Datuk Seri Tony Fernandes (40%), Datuk Kamarudin Meranun (30%), Dennis Melka (25%) and Tune Strategic Investments (5%).
Difficult days expected for MVNOs. Without a mobile network, MVNOs are simply at a core disadvantage against mobile operators who have spent significant amounts on capex to build and establish their networks. In an unlikely event of a price war, MVNOs simply cannot compete on the same playing field as the mobile operators.
Celcom most aggressive in supporting MVNOs. We note that Celcom has been the most aggressive mobile operator in allowing MVNOs to leverage upon its extensive network.
These MVNOs are to capture specific segments of the markets where Celcom had not been very successful. However, we do believe that Celcom could also run into the risk of cannibalization by the very same MVNOs.

Share price performance

Largely flat. There were little movements in share prices in the last week of December 2008 due to the lack of news flow and many investors still on the sidelines. In a filing on December 16, EPF bought 600,000 TM shares to increase its equity stake to 15.5%. Since end November with an equity stake of 15.2% in TM, EPF has been accumulating TM shares to reach its current  hareholding of 15.5%. We believe EPF’s move could be motivated by TM’s fairly decent gross dividend yield of 6.3%


P1 only one thus far to launch services. With YTL e-Solutions Bhd (YTLE) having missed its previous Aug 2008 target to roll out its services, and the lack of news flow from the other WiMAX players, Green Packet’s subsidiary Packet One Networks (Malaysia) Sdn Bhd (PI) remains the only WiMAX player to have successfully launched the new technology in the market. With the progress on the WiMAX rollout moving slowly, doubts are starting to surface whether the government’s target of 50% broadband penetration by 2010 can be achieved. The government had previously set a 75% target, but subsequently lowered it to a more realistic 50%.
Still no action taken by government for missed deadline. The government had earlier ruled that all WiMAX players must offer the service to 25% of the population in their service areas by end 2008 or see their licence revoked. However, no such action has been taken to date despite every other player except Green Packet missing the deadline.

Global News
Li increases offer for PCCW. Richard Li, chairman of PCCW, and his Chinese statecontrolled partner have raised their offer to take the Hong Kong telecoms company private in an 11th-hour bid to win over disgruntled minority shareholders. Just minutes before a meeting at which PCCW investors were expected to reject an initial buy-out proposal priced at HK$4.20 a share, Mr Li and China Unicom, PCCW’s two largest shareholders lifted their offer by 7.1% to US$2.2bn, or HK$4.50 a share. The revised offer was final, they said. A vote on the new bid is likely to take place in February.
Qatar Telecom to acquire majority stake in Indosat. Qatar Telecom announced on December 24 it will proceed with a tender offer worth up to US$870m to acquire a majority stake in Indosat, Indonesia’s second largest mobile phone operator after Jakarta withdrew conditions on the deal. QTel bought 40.8% of Indosat for US$1.8bn in August but has baulked at completing the compulsory tender offer after the Indonesian government insisted the Middle East operator sell off Indosat’s fixed-line assets within two years if it wanted to acquire more than 49% of the company. After Jakarta backed down, QTel confirmed it would pay Rp7,388 (US$0.665) per share for up to an additional 24.8% of the company. It is not clear how many additional shares QTel will buy. In the past executives have only said they want a majority. It would cost QTel US$331m to buy the 9.2% required for a majority and US$870m if it wants to own 65% of Indosat.


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