Thursday 28 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on April 5, 2021 - April 11, 2021

A clear winner in the country’s MyDIGITAL digitisation push, Telekom Malaysia Bhd’s share price hit a new all-time-high of RM6.62 on Feb 9, beating the previous record of RM6.45 in May 2015. While prices had since retreated, they are poised to reach new heights if the more bullish street predictions are to be believed. If the fact that Telekom’s share price had doubled in the past year and tripled from its decade-low of RM2.02 on Oct 26, 2018, is heaping additional pressure on the company to outperform, its managing director and group CEO Imri Mokhtar is taking it in his stride: “I guess we will be fairly rewarded by shareholders [as we focus on serving our customers better].”

Yet, the pressure to perform is certainly on: “What gets measured gets done [so] you’ll see the whole organisation moving at a different tempo,” Imri tells The Edge, relating how every team leader and department has been given specific targets to meet to ensure that the whole organisation transforms into one that fully supports the nation’s digitisation agenda within three years. He gets a weekly progress report on these targets to ensure the organisation stays on track.

Imri’s stance that Telekom needs to first be “commercially sustainable” in order to support the country’s digitisation push and nation-building efforts for the long haul would likely also find favour among investors.

Investors are likely already encouraged by Telekom’s recent guidance that its FY2021 revenue is set to grow by “flat to low single digits” while its Ebit (earnings before interest and taxes) will exceed last year’s RM1.6 billion despite the fact that it is likely to invest more on infrastructure this year.

Even if revenue growth were flat this year, Telekom would already have halted three straight years of year-on-year decline since reaching RM12.09 billion in FY2017. Telekom’s revenue fell 5.2% y-o-y to RM10.84 billion in FY2020, within its guidance of a low- to mid-single-digit decline. Growth of Ebit beyond last year’s RM1.604 billion would mark a second consecutive y-o-y growth.

“Last year, we saw the full impact of the Streamyx price adjustment — that contributed to the revenue decline. But 2020 was also about focusing on fixing business fundamentals [of] the products from go to market to distribution. We have seen good momentum. We are confident that would contribute to a much more positive revenue outlook this year. Hence, our guidance after three years of revenue decline of at least flat to single-digit growth. And couple that with the continuous momentum of the cost optimisation, we do look at a healthy Ebit [that is] more than last year’s RM1.6 billion,” Imri says.

“Even if it is a flat year, it would be a five percentage point improvement from minus 5% last year. Any single-digit growth would be more than a five percentage point improvement. So it’s a journey. What’s important, I think, is there is clarity in terms of what we want to deliver behind the market guidance: that’s 43 value programmes and 216 sub-programmes with detailed business case and implementation plans in place.”

Even so, that Telekom is perceived to be a beneficiary of the country’s digital transformation agenda is clearly seen in the bullish price targets on its stock, which is already reflecting more than the expectations of potential dividend yields that have largely dictated the level of share prices for most Malaysia-listed telecoms stocks for some years.

According to Bloomberg data at the time of writing, there was an overwhelming 18 “buy” calls on Telekom versus only four “hold” and three “sell” recommendations.

Apart from JP Morgan’s RM3.70 and HSBC’s RM4.60, target prices of 17 other analysts who updated their calls since late February ranged between Public Investment Bank’s RM6.60 and Macquarie Research’s RM8.02. At least 10 analysts were telling clients that Telekom should be worth at least RM7 apiece within the next 12 months, implying at least 13.8% upside potential from the RM6.15 that Telekom closed at last Tuesday (March 30). That is excluding the dividend of 10 sen to 19 sen (averaging at 16 sen) that analysts polled on Bloomberg expected Telekom to pay in FY2021, which, in turn, implies yields of 1.6% to 3.1% at last Tuesday’s close.

Telekom’s market capitalisation of RM23.2 billion (22.8 times PER and 2.33% TTM yield at a closing price of RM6.15) has closed the gap with Digi.Com Bhd’s RM28.9 billion (23.7 times PER and 4.19% TTM yield at a closing price of RM3.72) and remains ahead of Time dotCom Bhd’s RM8.7 billion (26.5 times PER and 2.3% TTM yield at a closing price of RM14.38) but is still some way behind Maxis Bhd’s RM36.4 billion (26.3 times PER and 3.66% TTM yield at a closing price of RM4.65) and Axiata Group Bhd’s RM34.8 billion (95 times PER and 3.03% TTM yield at a closing price of RM3.79).

Will anything rain on Telekom’s parade?

MSAP review and 5G SPV wholesale pricing are factors to watch

To be sure, this is not the first time that market sentiment has favoured Telekom over the mobile operators, which seem to have lost some shine among investors as the rise in cost pressures weigh on their ability to increase dividends even before the government announced plans to wholly-own the country’s only 5G network infrastructure.

Telekom’s over 560,000km build-up of fibre-optic cables nationwide (excluding over 246,000km of copper cables) that reaches over 5 million premises — which Imri says is enough to circle the earth 15 times even before they are expanded to pass another 2.5 million more premises in the coming two years — that puts the group in a prime position to support the country’s digitisation roadmap under the National Digital Network (Jendela) was also the cause of its share price fall in late-2018. The latter was when the government ordered broadband prices to be halved and implemented the Mandatory Standard on Access Pricing (MSAP) that forced Telekom to sell wholesale capacity of its network at much lower prices to rivals offering competing broadband services for the benefit of consumers and businesses.

It is understood that the first three-year review of the MSAP pricing is “ongoing [for 2022]” and Imri says only the Malaysian Communications and Multimedia Commission (MCMC) can say whether there would be any significant changes post-review and when a decision would be arrived at.

“We are in continuous engagement and discussion with MCMC to finalise the MSAP, [which] very much dovetails to the wholesale pricing that is tied to the 5G SPV (special purpose vehicle) ... I think the MSAP needs to be fair to all parties, affordable to those seeking access and fair to those investing in the infrastructure. A balance needs to be struck and I’m confident that the MCMC will be managing that and balancing that,” Imri says.

“I think the industry overall has taken lessons from what has happened [in 2018]. It needs to also encourage investments by the telcos, in this case, by TM. As we all appreciate, TM is a public-listed company [though] there are also expectations of contributing towards nation-building as a GLC (government-linked company). First and foremost, this is the clarity that we have established together with the board, our purpose needs to be anchored on commercial sustainability, which is in terms of profits and returns to shareholders. Only by being commercially sustainable could TM continue to play that role to develop the critical infrastructure for the country,” he adds.

It remains to be seen if the government’s stance for telecoms operators to compete on services and not infrastructure build-up would be extended to broadband since there is no issue of network or infrastructure duplication when it comes to fixed-line and fibre compared with that for mobile telephony.

Capex for growth

For its part, Imri says Telekom is keeping a tight rein on costs to remain resilient for the long haul but is ever ready to step up investments in growth areas that are likely to bring in more income for the group.

Telekom’s guidance of capital expenditure at 14% to 18% of revenue this year — which works out to RM1.52 billion to RM1.95 billion if revenue is flat at RM10.48 billion y-o-y — is higher compared with RM1.49 billion (13.7% of revenue) in FY2020 and RM1.36 billion (16.2% of revenue) in FY2019, our back-of-the-envelope calculation shows. This, Imri says, already includes expected spending for its participation in Jendela but not potential investment in other areas that may be deemed strategic.

“In terms of capex, it will be higher — compared with previous years — in 2021 and potentially over the next year or two as well, to support the growth that we expect to come from the market segments we serve through Unifi [retail], TM One [business-to-business] or TMWholesale [telcos],” Imri explains, noting that targets are set to make sure returns commensurate with investments being put in.

Because Telekom has been investing in data centres spanning 200,000 sq ft since 2016 and also has existing cloud infrastructure with full data residency and sovereignty that fulfils Bank Negara Malaysia’s Risk Management in Technology requirements for financial institutions seeking to migrate their data, Imri says its existing capex guidance does not include the RM12 billion to RM15 billion that Prime Minister Tan Sri Muhyiddin Yassin said cloud service providers (CSPs) would be investing in Malaysia over five years when launching MyDIGITAL on Feb 19 and naming Telekom as well as Microsoft, Google and Amazon as the four CSPs that have been given conditional approvals to build and manage hyper-scale data centres as well as hybrid cloud services here (see sidebar on data centres).

TM One, Telekom’s business-to-business arm, had last July sealed a collaboration with Huawei Technologies (M) Sdn Bhd to enable next-generation innovations such as data analytics and robotic process automation for customers via TM Cloud  (Cloud Alpha) services. At the time, TM One had said cloud offerings were expected to grow at a compound average growth rate of 27% over five years.

In March, the Malaysian Investment Development Authority (Mida) signed a collaboration with TM One to accelerate digital transformation among industry players in support of the National Policy on Industry 4.0 (Industry4WRD), having already deployed high-speed broadband (HSBB) connectivity to 33 industrial areas nationwide by February.

Given that the government, through its Cloud First strategy, has targeted to migrate 80% of public data to a hybrid cloud system by end-2022 as part of its strategy to reduce the cost of managing data and information in the long run, the four CSPs would likely soon be competing for public tenders on this front.

“There are areas that we will be competing in. As per announced, the government has shortlisted four: Telekom Malaysia and another three [Microsoft, Google and Amazon]. So it will be a choice of the four that I believe the government would be looking at to provide cloud for the government sector. We do have to appreciate as well that when it comes to government data, there is the top secret and the ones that are available in the public domain. I think Telekom will have a different value proposition. We would be able to provide more data sovereignty because we are the only home-based [of the four CSPs named].”

Imri, however, noted that “co-opetition” is common in the telecoms industry, leaving the door open for collaboration with Microsoft, Google and Amazon where it makes business sense. He declined to provide a ballpark gauge on Telekom’s market share in the cloud and data centre segment, describing the market as “fluid” and “always evolving”. He also declined to project how Telekom’s revenue and earnings mix are poised to change with the impending changes.

A sizeable part of group earnings is no longer contributed by the sale of broadband, though its top-line contribution remains sizeable. For FY2020, Unifi or its mass-market retail business brought in 42.5% of RM10.81 billion in total revenue but only 37.8% of its RM1.6 billion Ebit while TM One or its managed business accounts brought in only 34% of revenue but 62.6% of total Ebit. TM Wholesale, which serves domestic and international telecoms operators, brought in 20.1% of revenue and 22.2% of Ebit in FY2020 while its shared services and other business segment contributed 3.4% of revenue but was loss-making (see Table 2).

Already part of 30 submarine cable consortiums [22 of which are connected to Malaysia], Telekom is also ready to invest to expand its international connectivity, says Imri, adding that Telekom it is still awaiting guidance from the government on the RM1.65 billion the prime minister said on Feb 19 that will be invested by “several telecommunications companies to strengthen connectivity to the international submarine cable network until the year 2023 [to enable] faster and more stable international data transfer and, in turn, lower internet costs to consumers in Malaysia”.

Moving beyond broadband to cloud and data

Citing Telekom’s “Digital Malaysia” billboards, Imri says the company has been preparing for “at least two years” to enable and support the country’s transformation into a digital nation with a digital-savvy society, businesses and government. “Fiberisation has been progressing since 2010. Whether it is HSBB, HSBB2, SUBB, NFCP or Jendela, to Telekom Malaysia, it is all about rolling out more fibre to more premises.”

While the mobile operators have also been building up partnerships to cater for enterprise customers’ needs in areas like cloud computing, way beyond just providing corporate phone packages, Imri says Telekom has existing relationships with customers that it can build on at a time when there is great desire to step up digitisation to close gaps shown by the Covid-19 pandemic.

“Even before the announcement of MyDIGITAL, Telekom Malaysia had been serving the government, the public sector, through TM One, our business unit, for connectivity, digital infrastructure. It was always something that was on the roadmap but there is greater clarity now with the announcement of MyDIGITAL,” Imri says, noting that Telekom has long served more customers than just the 2.7 million home broadband users that the public identifies the group with.

“What’s important is that the connectivity underpins the digital infrastructure that goes above that. So that’s where you have your cloud, IoT (Internet of Things), smart solutions … that makes life and work easier for the various customer segments. So, when we talk about Digital Malaysia, it is really to look at the whole multi-segment of the end users of Digital Malaysia and the customer base that Telekom Malaysia has been serving for many, many years [to] move to the next level of that digital journey.”

According to him, Telekom’s current three-year transformation journey “is not just about connectivity or cloud but co-creating a digital journey with customers — especially the 12,000 enterprises, public sector customers and 380,000 SMEs (small and medium enterprises) we are serving today”.

Citing developments in healthcare as an example, Imri says the type of conversation happening with the more sophisticated customers include customising digital solutions that allow healthcare providers to have continuous engagement with their customers — when they are well and healthy and not just when they are ill and admitted to the hospital.

“Creating a solution with wearables involves IoT, where customer data gets stored in the cloud and data analytics provides insights and information [for clients to serve their customers better]. That’s what I meant by it’s not about selling cloud [but rather] cloud and IoT are all jigsaw pieces towards building that real solution that we need to bring to healthcare, retail and manufacturing,” Imri explains.

While having a mobile arm and 850MHz spectrum — currently renewable on an annual basis as an apparatus assignment instead of a regular spectrum assignment — can be useful, Imri says Telekom is not out to compete for a slice of the already-crowded mobile telephony market but, rather, sees having a mobile arm as part of a wider converged offering for its customers.

“Unifi Mobile will never be like a mobile player; our focus is very much on fixed proposition, broadband and convergence [value chain of digital services] with mobile being a complimentary service on top of broadband,” Imri says, adding that Telekom welcomes the government’s move to cut infrastructure duplication for 5G via the creation of the government SPV, Digital Nasional Bhd (DNB).

“Today, much is driven by connectivity [but as the ecosystem matures, it will shift] to coming from solutions and connectivity to mobile will just become a by the way [secondary] because what people really want is the lifestyle solutions. I want my wearable or hospital to track and what I’m buying is not fibre or 5G but a value proposition for healthcare.”

Imri admits that Telekom needs to hire and train its people to further bolster the group’s technical capacity to better serve customers’ current and future needs. “We have been hiring but that’s not enough. It’s also about collaboration. We are finalising a collaboration with a leading artificial intelligence (AI) company, which we will be announcing soon [to help build up its AI capacity].”

While some investors would recall Telekom’s very generous dividend promise of at least RM700 million or up to 90% of its normalised Patami (profit after tax and minority interest) when it demerged with Axiata and stepped up investments in building fibre — a policy that was revised in 2019 to 40% to 60% of Patami — Imri says its current dividend policy “will remain for the time being” unless the board sees a reason to revise it.

Imri — who just finished the eighth month of his three-year contract as group CEO [he was previously elevated from chief operating officer to acting CEO of Telekom from November 2018 to June 2019] — knows success is all about execution. “It is also about putting the best talents and giving them the opportunity [to perform].”

If he only achieves one thing during his three years, Imri says it would be to future-proof Telekom as an organisation and inculcate a performance-driven culture. “How the organisation executes things needs to be much more focused, with great clarity in terms of deliverables and outcomes, which we are now … It is about building new skillsets and digital leadership … It is about being a much more performance-driven organisation … It is about defining what you need to deliver, whether it is revenue uplift, whether it is cost, whether it is the customer experience programme that you are in. Are you making week-on-week progress and are you on target?”

Success on this front would truly see what was once a lumbering giant transforming into a true pillar and enabler of the country’s digital transformation. As Imri puts it, investors will reward organisations that can sustainably deliver results.

 

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