BEING a dominant player in an industry would evoke the envy of companies struggling to survive on razor-thin profit margins in a highly competitive and fragmented market. But Telekom Malaysia Bhd (TM) managing director and CEO Tan Sri Zamzamzairani Mohd Isa probably does not think he has a cosy job.  

TM dominates fixed-line telephone services in Malaysia and currently enjoys the lion’s share of the local high-speed broadband (HSBB) market.

However, keeping up with the telecommunications company’s rivals, including sister company Axiata Group Bhd, is not a 100m dash for Zamzamzairani but a long-distance race. He has to be on a constant lookout for fresh growth drivers and keep fine-tuning the telco’s business model to maintain its foothold in the industry.

This explains why TM advanced from HSBB to mobile broadband services. And as in the past, its bold move to take up a controlling stake in loss-making WiMAX operator Packet One Networks (M) Sdn Bhd (P1) — an investment of more than RM1 billion, including capital expenditure — came in for a lot of flak.  

But already, before seeing any contribution from P1, TM is paying the price of investing in the unprofitable company. In its first quarter ended March 31, 2015 (1QFY2015), net profit plunged 38.8% year on year to RM128.9 million, although revenue grew 6% to RM2.77 billion.

The weaker earnings despite higher revenue were mainly due to the consolidation of P1’s loss of RM49.6 million at Ebit (earnings before interest and tax) level as well as higher operating costs, such as direct and staff expenses.

Excluding foreign exchange and one-off gains/losses, TM’s normalised net profit of RM171.3 million in 1QFY2015 was still below market expectation — only 17.8% of consensus’ full-year forecast.

In a knee-jerk reaction to the release of the 1QFY2015 results on May 29, TM’s shares slid 6.2%.

Now, Zamzamzairani has to talk hard to convince the investing public that buying into P1 was an essential move that will eventually yield returns.  

The 55-year-old has been at the helm of the telecoms giant since April 2008 when TM undertook a demerger exercise that separated the group’s fixed line services from its mobile service operation.

Back then, he had to convince his staff and investors that there was hope of survival and growth for the dinosaur — which was how TM was perceived at the time — without the mobile service operation, which was in an exponential growth phase.

Subsequently, Zamzamzairani was tasked with investing in HSBB despite shareholders’ doubts about the returns from such a massive investment. TM’s RM8.9 billion investment in HSBB started to bear fruit with UniFi becoming a household brand but the ever-changing telecoms landscape would not let Zamzamzairani rest on his laurels.

But he quickly found the missing piece in the puzzle — mobile broadband services.

Mobile data services are becoming the bread-and-butter business for local mobile operators and are expected to surpass mobile voice revenue in 2017, according to International Data Corp’s (IDC) Mobile Service Tracker.

With its investment in P1, Zamzamzairani believes the telco, which aspires to become a converged service provider within three to five years, now has a complete portfolio of products to deliver converged communication services, including fixed as well as mobile and wireless services.

“If you look at the big picture, we are already the broadband champion in Malaysia. Our customer base has increased to 2.23 million, led by more than 780,000 UniFi subscribers, and counting. So, what is TM’s next step? The key is to become a convergence champion,” he tells The Edge.

For TM, convergence means to build and operate a seamless network that is capable of supporting all customers and anytime-anywhere-any device applications, he explains.

“Before, whether the users were at home or in the office, they were our customers. Today, even when they are outside, they can still be our customers as we have deployed WiFi in many locations, such as shopping malls.

“The one thing that was missing was when these people were on the move or when they were in places with no access to WiFi. Now that P1 is part of our family, we can provide that mobility piece to complete the picture, so these customers can remain our users wherever they are.”

To recap, in March last year, TM (fundamental: 0.80; valuation: 1.10), Green Packet Bhd (fundamental: 1.10; valuation: 0.30) and South Korea-based SK Telecom Co Ltd (SKT) established a partnership framework to jointly invest in P1.

TM’s initial investment was RM350 million to subscribe for a 57% stake in P1 and RM210 million to pump into Green Packet’s newly issued medium-term notes (MTN), which may be exchanged for Green Packet’s stake in P1 at a later date.

To date, TM has invested close to RM120 million of the RM210 million MTN. The remaining RM90 million is expected to be used this year.

The acquisition of P1 was completed last September with TM controlling 55.3%, Green Packet 31.1% and SKT 13.6%.

With regard to funding commitments, the MTN programme provides P1 with the avenue to raise future funds of up to RM1.65 billion in tranches, of which TM is entitled to subscribe for up to RM990 million within three years. The proceeds raised via the programme will be utilised to finance the implementation of P1’s business plan, which will involve the rollout of a long-term evolution (LTE) network.

When TM’s shares were trading at around RM7.20, PublicInvest Research analyst Lee Wee Sieng, in a June 1 report, warned that the stock had overvalued the potential of its new wireless business, which carried execution risks.

Commenting on the impact of P1’s losses on TM’s financial performance, Zamzamzairani says the acquisition must be given time to reap rewards for the group. “When you acquire a company, of course, there will be the integration cost, which you will have to bear. This is not a surprise; we knew that was going to happen.

“What is more important is how we turn P1 around. The compelling story is that we now will be able to provide converged services, which we couldn’t before.”

But it has been nine months since the acquisition and the management teams of TM, Green Packet and P1 still cannot say when P1 will become profitable.

Most research analysts expect TM’s earnings to continue to be weighed down by P1’s losses in the coming quarters, if not the coming years.

However, Zamzamzairani says they have their own time frame. “There is only so much we can share openly. Just wait and see. We are working hard on integration and we have already put in a strong management team in P1.”

The actual business plan may seem sketchy at the moment but it is learnt that P1 is making a transition from fixed wireless broadband provider to digital mobile telecommunications player providing 4G-LTE services.

Although it appears that P1 may fight with the Big 3 — Maxis, DiGi and Celcom — for market share, Zamzamzairani clarifies that TM is not positioning itself as a mobile operator.

“TM is not going to be the fourth mobile service provider. We will be the No 1 in convergence but that would include us providing pure mobile services through P1,” he says, adding that with TM’s backing, P1 has a strong chance of returning to the black.

“The P1 story is not just a P1 story anymore. It is now a TM story. It is a member of our family.”

Now, investors will be left wondering about the company’s future dividend payout, considering the huge capital expenditure for P1 and Phase 2 of HSBB in the coming years.

While the acquisition of P1 shows that TM is making a comeback to the mobile service sector, it is worth noting that the telecoms industry has evolved over the years — the mobile service sector has passed its high-growth phase in terms of penetration. The question now is, how much will TM, a fixed line service operator, eventually benefit from its push into wireless business through P1?

It is noteworthy that TM’s financial performance and dividend payout are constantly in the limelight because it is 28.95%-owned by sovereign wealth fund Khazanah Nasional Bhd and 15.07%-owned by the country’s largest retirement fund, the Employees Provident Fund.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on July 6 - 12, 2015.

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