What You Need To Know About Telekom Malaysia Before Investing

Do you remember the days where you still have to use a dial-up modem to access the internet? I certainly do because I hated it. The loud noise that does not have a mute button. The slow slow slow speed that we have to endure. I remember cursing Telekom Malaysia Berhad (KLSE:TM) ([stock_quote symbol=”KLSE:TM” show=”name” nolink=”1″ class=”1″])every time I was online.

However, even since we switched to its broadband service, Unifi, the cursing has stopped. In fact, Unifi has done the most in bringing Malaysians more connected to the world. During the first few years of the rollout, Telekom Malaysia even made history by breaking the record of the fastest rollout of high-speed fibre network in the most cost-efficient way. Today, Telekom Malaysia is the number one broadband provider in Malaysia. Listed on Bursa Malaysia, it has more than 2.37 million broadband customers and has a revenue of RM 12.1 billion at the end of 2016.

With the internet taking a more prominent role in our everyday lives, is Telekom Malaysia Berhad the stock for us to invest in?

Here is our SWOT analysis on the company.

1. Stock Information

TICKER SYMBOL: KLSE:TM | 4863.KL

MARKET CAP: RM 24.6 Billion (Updated 12th June 2017)

INDUSTRY: Telecommunication

2. The Business

Telekom Malaysia Berhad is one of the oldest telecommunication companies in Malaysia. With a history dating back to 1946, it started out as a full range telecommunication company with radio and television services and also fixed line telephone services.

After years of transformation and a major demerger in 2008, the current Telekom Malaysia was formed. In 2008, the company demerged its fixed line, broadband business from its mobile business. Today, the mobile business is also listed on Bursa Malaysia as Axiata Group Bhd (KLSE:AXIATA) ([stock_quote symbol=”KLSE:AXIATA” show=”name” nolink=”1″ class=”1″]).

Telekom Malaysia has a wide range of services but it is the market leader in the fixed line and broadband provider in Malaysia. Other services include:

• Mobile Internet
• Managed data centre solutions
• Managed telepresence services
• Cloud services
• Managed network & network integration

Business Segment

It groups its business segments as:

• Internet
• Data
• Voice
• Others

In 2016, its internet service recorded revenue of RM3.67 billion, making it the largest segment for the company. This is mainly growing due to its flagship Unifi broadband services, which is still seeing a strong 13.1% year-on-year growth in subscribers.

Its legacy voice service is its second largest segment, recording a revenue of RM3.33 billion. As expected, this service is facing a structural change and has been seeing a slow decline in revenue for many years.

Its data services include its leased, Ethernet, IPVPN and IP services, which mainly target the wholesale and large corporate clients. This segment recorded a sale of RM2.74 billion in 2016.

Its others segments consist of two groups:

• Other telecommunications related services
• Non-telecommunications related services

Other telecommunications related services comprise of services like customer projects, maintenance, broadcasting, managing information and Communication Technology, business processing and others. The clients for this segment are mainly corporates or government departments.

There is a small portion of non-telecommunications related services, part of its due to its legacy businesses. This segment only generated about RM337 million in revenue in 2016.

3. Key Opportunities

Connecting The Whole Of Malaysia

The main growth story of Telekom Malaysia is the rollout of its high-speed broadband service, Unifi. Even though Unifi is now one of the largest high-speed broadband services in Malaysia, it is only serving less than 1 million subscribers at the moment. Telekom Malaysia is still seeing a large upgrading group of customers that are switching to Unifi from its slower Streamyx broadband services.

As more customers switch over to Unifi, the company should enjoy a higher revenue given the higher price point for its Unifi services.

Rise of Internet Usage In Malaysia

As the company owns a large fibre network infrastructure across the country, it is able to charge a fee for other companies to use its infrastructure. Therefore, regardless of which internet provider the retail customers end up choosing as their internet provider, chances are some portion of the revenue would still end up at Telekom Malaysia for usage of its infrastructure.

Thus, with the demand and usage of internet increases in Malaysia, Telekom Malaysia could stand to benefit from the overall increase.

4. Key Risks

Execution Risk

Telekom Malaysia is also going into many areas where it is not the market leader. For example, one is the mobile internet business. Its mobile internet business, Webe, is still unprofitable and is in a much more competitive landscape than its traditional fixed line and fixed broadband sectors. There are many more mobile internet providers in the market, including the market leaders such as Axiata Group Bhd, Maxis Berhad (KLSE:MAXIS) ([stock_quote symbol=”KLSE:MAXIS” show=”name” nolink=”1″ class=”1″]) and Digi.com Bhd (KLSE:DIGI) ([stock_quote symbol=”KLSE:DIGI” show=”name” nolink=”1″ class=”1″]).

Convergence Of Demand

There is a more structural issue within the telecommunication sector. And that is the trend that everything is moving toward the demand for internet and data usage. In the past, telecommunication can be segmented out into many categories like:

• Fixed line
• Mobile line
• SMS
• Television
• Radio
• Pay-TV

However, with the speed of internet now high enough to support video streaming, most of the services above are now available through OTT (over-the-top) service providers. For example:

• Fixed line (Skype)
• Mobile line (Whatsapp Call or Facebook Messenger Call)
• SMS (Whatsapp & weChat)
• Free and Pay Television (Netflix)
• Radio (Spotify)

This might mean that all the telcos in the industry, which are now providing separate services for the market might end up competing with one another with just providing ONE service, providing access to the internet.

If this really happens, the traditional monopolistic or oligopolistic business model of the telecommunication sector might disappear and all the players in the market are just competing in a great big RED ocean. Margins of these companies might greatly suffer in the future.

5. Valuation

Telekom Malaysia is current trading at about 31.8 times its earnings and at 3.3 times its book value. The telco also provides a dividend yield of about 3.3%.

Telekom Malaysia has an interesting dividend policy;

“We intend to distribute yearly dividends of RM700 million or up to 90% of our normalized PATAMI (profit after tax and minority interest), whichever is higher.”

This means the company will pay out most of its profit every year, an ideal situation for an income investor.

6. Investor Relations

Investor Relation Material:

• Annual Report

For matters relating to Investor Relations, kindly contact:

Rohaila Mohamed Basir
Head of Investor Relations
Level 11 South Wing Menara TM,
Jalan Pantai Baharu, 50672 Kuala Lumpur
Tel : 603 2240 4848 / 7366
Fax : 03-7955 0533
Email: investor@tm.com.my

For shareholders or general investors who wish to direct their concerns to TM’s Senior Independent Non-Executive Director, Tunku Dato’ Mahmood Fawzy Tunku Muhiyiddin, please email to sid@tm.com.my

7. Top Shareholders (31^stDec 2016)

1. 1. Khazanah Nasional Bhd – 26.21%
   2. Employees Provident Fund Board – 16.00%
   3. Amanah Saham Bumiputra – 12.88%

8. Financials

• Income Statement
• Balance Sheet

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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Stanley Lim’s personal capacity and do not in any way represent those of his employer and other related entities. Stanley Lim does not own any companies mentioned.

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