Telekom-Green Packet: The weird world of Malaysian telcos

Remember years ago when Telekom Malaysia (TM) had TM Touch? They were going nowhere and for TM to have a significant mobile business and successful one, the forced (sort of) purchase was planned. After the purchase of Celcom from Tajuddin Ramli, years later it was split again, presumably for Celcom and its mobile business to have a solid Asian strategy, hence Axiata.

TM on the other hand, was given a lot of handouts in the form of financial assistance for its fiber broadband rollout - to the tune of multi billions. With that handout, few would think that TM can fail. In fact when Celcom and other mobile businesses were split from TM, these mobile group was structured to owe TM something like RM4 billion, another assistance to TM.

TM should not and cannot fail, just like MAS. The difference between MAS and TM is that MAS is fighting globally competitive players. TM is given a headstart in any of the competition it goes into, something like standing on the 50 meters mark in a 100m race while the rest will have to start from the beginning.

Who will think TM will succeed in the mobile data business acquiring Green Packet? I don't.

In a standing start against players like Maxis, Celcom, Digi - it will pretty much lose, what more coming from behind although it has the backbone of fiber optics - something that the others lose out to TM.

In a business of telco, it is not just the infra. Tell that to Digi, which does lose out in infra - even for the LTE spectrum and it did not even have the 3G spectrum earlier - forced to a deal with Time Dotcom.

This deal does not help anybody but to postpone the demise of Green Packet while another player whom are not able turnaround anybody is thinking that it can. SK Telekom's name is just a convenient partner to bring the story line sounds better. After all, it has been with Green Packet for many years and nothing really happened.

Telco: The signs of times to come

After reading through SingTel's results, I have a feeling that our local telcos will face the same predicament. Revenue for SingTel from the more developed mature market such as Australia and Singapore continue to face growth pressure, while India remains very competitive. Telcos will find more opportunities from Indonesia.

Click to enlarge

As you can see above, among the big 3 mobile players in Malaysia, total revenue seems to be stagnating with a CQGR growing at 1.1% from 30 Sep 2009 to 30 June 2012. It also seems that the larger telcos are getting squeezed in terms of revenue as the product becomes more and more commoditized. It happens in Japan (with Softbank's ability to get a big chunk of revenue from especially NTT and KDDI). It happens in Malaysia with Digi.

In terms of stocks, both Maxis Mobile and Digi only have operations in Malaysia while Axiata has better exposure with more potential. I feel that with the exception of Axiata which is potentially still a stock with some decent growth, Digi and Maxis will just be a dividend stock.

Maxis Malaysia and the power of cashflow

I have written about the power of cashflow for company like AEON where they basically used suppliers financing to finance some part of their business. Of course business like AEON will need to do the investment first (such as capital expenditure on buildings, land, equipment etc) then only they will stuff suppliers goods in their outlet. Collections are in cash, payment to suppliers can be up to 90 days.

This time, I am going to introduce another company which on its balance sheet, it can seemingly be seen as insolvent as it is on negative tangible asset value but yet the company is valued at RM48 billion valuation.

Just look at above - as at 31 Dec 2011, Maxis has locked in a intangible assets of RM11.06 billion while cash holding was just RM838 million. Total equity at that period was RM8.088 billion hence the company's total NTA was negative RM2.971 billion. To add further, its total borrowings was RM5.873 billion as shown below. Is its balance sheet under duress? Hell NO.

Borrowings for Maxis Malaysia

Why?

Just look at the amount of cashflow it is generating yearly. Operating cashflow of over RM4.3 billion yearly. From these cashflow, how much are needed to invest into the maintenance or ungrading of equipment. Lets look at another table...

Operating Cashflow of Maxis Malaysia

Based on below, it is reinvesting somewhere between RM1 - 1.5 billion for equipment upgrades or enhancement.

Hence, the net free cashflow Maxis Malaysia is generating is in excess of RM3 billion yearly. This is why they can be more than RM5.8billion in debt, negative NTA and yet the market is valuing Maxis at RM48 billion. Of course, the company is generating Net Profit of more than RM3billion as well, yearly.

You may want to ask, if the company is generating so much cashflow, how come its balance sheet is in so bad shape?

Remember, the delisting and listing back in Bursa. Well the delisting is for some magic financial trick where all the major absorb-dable debts are park at Maxis Malaysia, the vehicle to issue dividend as well and at the same time it can still get good decent valuation. The one that needs much more funds and perhaps may not be generating such cashflow will be held private and not seen in the eyes of public. (When you do not have a beautiful wife why bring them out that often?)

After the financial cleansing are done, they then list Maxis Malaysia. Usually Ananda's stable would be showing (and listing) the nice companies with strong cashflow so that they can issue (and proven to) dividends, while the non-paying dividends companies will usually be held private. This is because Malaysian investors are quite a sucker for dividends (me inclusive), hence the valuation.

A better example of a Malaysian telco with full-fledged regional operations where one country's operations will provide the cashflow while some other countries will absorb / use up the cash generated - look at Axiata. You will get a bigger and better picture from there as not all telcos are purely cash generating alone.

There are others cheaper than Digi - So?

If you are an investor of Digi and probably may think of switching - Consider this. Ever since Telenor bought over Vincent Tan's ("VT") stake in Digi, investors who stayed with Digi until now has uncountable returns over a period of 10 years. In 2001, Telenor bought (from VT) and increased its stake in Digi to 61%. At that time the price went to as low as below RM4 sometime around 2003. Now less than 10 years after, after two rounds of capital repayment, huge dividends with yields of 4% to 8% every year, it is now priced at RM3.94 - and did I forget to say that this price is after a 10 for 1 split last year. All these things were in a short span of less than 10 good years. Hows that?

Hence, how can you fault a company that gave you such a return. Now, annually Digi is continuing to provide a dividend yield of 4% to 5%. You do not bite the hands that feed. But what if I tell you that there are better value stocks than Digi, and you do not need to look far. What if I tell you that Maxis and Axiata are even more attractive than Digi? Yes, its own competitors. Just look at the below table.

If you look at purely PE Ratio alone, it is fantastic that investors are valuing a third player higher than its peers. Normally, investors are more susceptible to providing a higher value to the leading player than its lower ranked competitors. This shows how much value creation the Telenor group has provided to its shares. Why? This I attribute to the way Digi under Telenor treats its shareholders. Besides providing value and good return, they have been by far the most consistent among the three. Ananda Krishnan is not AK if he does not list and delist and list back companies. This becomes his hobby! That action of inconsistencies, to the shareholders is not good. Although any investors who invested into his group of companies would have made good money from their holdings the action of pulling back a listed company and list them back does not augur well for people like me - pure investors.

Just look at the stats above for Maxis. Why is the NTA negative? Well, these I believe is what he does to his holdings. Prior to the original Maxis being delisted, it used to hold telco businesses in Malaysia, Indonesia and India. The Malaysian one is a cash cow whereas the Indonesian and Indian entities needed more cash injections. Very usual for any businesses. But AK was concerned. As it is not so nice for a listed firm to reveal too much to the public (due to the value deterioration it can appear to create), he delisted the group and list back the Malaysian entity alone. Along the way, CIMB is probably the only one makes good money! - How wasteful. And Maxis Malaysia was geared up to pay for his foreign foray. While it is not a matter of concern, what makes people peeved over the entire exercise is the shuffling of balance sheet in the individual companies.

Having said the above, currently, Maxis Malaysia is still a very investible concern and in fact it is more attractive, valuation wise compared to Digi.

What about Axiata? Well, Axiata's current position is what AK does not want investors to see. If you noticed, Axiata's market capitalization is about the same as Maxis Malaysia. How is that possible? Celcom's (which is in between Maxis and Digi) size is only slightly smaller than Maxis but yet by buying into Axiata, you are getting the Indonesian, Singapore, Thailand, India, Cambodia, Sri Lanka businesses etc. in one stock. I noticed that some analysts used to be concerned over Axiata's debt. Hello? With the telco's nice positive cashflow yearly, they are overly concerned.

Among the three telcos, Digi has the better balance sheet as its debt is lower as compared to Maxis and Axiata. In any case, as the companies are generating healthy cashflow, debts should not be a concern for all three. In fact, judging from the position they are in, I am not worried over the balance sheet position for any of them.

Well, from the above, if you continue to believe the good things that Digi will provide, stay with the stock. But if you venture out, probably Axiata and Maxis will provide better returns over time. In terms of what is going to happen to these three companies business wise, I believe they probably would stay at where they are - as it is! There probably won't be much happening except for all three waiting for LTE to deliver. Over the next 5 years, the biggest challenge for these telcos is growth as their numbers seem to stagnate more recently especially last 1 year.


(Under a non-scientific method) When comes to quality of service, most people would rank the three telcos in the following order - Maxis, Celcom (under Axiata) and Digi although one could not differentiate much between Digi and Celcom. 

Happy Investing!

How deep is Green Packet's problem? Quite!

Green Packet is a company that is bleeding cash. Just like some of the telecommunication companies (telcos), it is being thrown into the deep sea without much life savers. Once a while they get some life savers in the form of SK Telecom (the big one), IntelCap and Malaysia Debt Ventures. They just have to continue to swim. Why is it that the company and all the shareholders, continue to be able to battle through? Telco business has some uniqueness where there are some interests from foreign parties. In Malaysia, any foreign party is not allowed to own more than 49% of a telco. This is why Telenor is still required to reduce its stake in Digi from 61% to 49% despite several approved appeal.

This is also why SK Telekom did the absurd by injecting in close to RM400 million into Packet One and yet to see the light of the day. They probably feel that RM400 million for 26% of a telco is worth it. Why? That uniqueness in telcos, as most countries see telco assets as a sovereign right. Companies like SK Telecom, Singtel, Telenor have not much room to grow anymore in their own respective countries. Imagine SK Telecom having a net free cashflow of some USD1 billion a year and they do not know how to grow the business any further. Besides issuing dividends, companies like SK Telecom will always look for opportunities overseas. These opportunities however are few and far between. That is probably why the Green Packet deal was stumbled upon. What they probably are short in the right decision making is that Malaysia is already a matured market in terms of telco business growth. Yes, South Korea is much more matured but the competitors in Malaysia are ruthless and cash rich already as well. In fact, Malaysian telcos are also already looking for opportunities overseas. Look at Axiata, Maxis.

Now look at the table above. By converting all the preference shares Packet One will have some of the debts converted into equity. Good stuff for Green Packet who is the holding company. But now what - will SK Telekom be injecting more money into Packet One? They already own 26.07% (via preference) of the company which is valued at some RM350 million. Will SK Telecom be the grand daddy again and value Packet One much higher than the market as what they did in the past? These are questions that only SK Telecom can answer.

If SK ever decides to pump in more money for whatever it is, trying to help to keep Green Packet afloat for the LTE and fibre broadband initiatives, how much more can they do to add to that 26.07%? Another 20% for RM150 million. That I foresee is still not enough for Packet One.

Green Packet has looked overseas and the overseas solution is going to be maxed out. They have to look inward as a solution. Any local takers? You see, SK Telecom's injection has to be met by locals so that the % shareholdings are even out. Again probably tough, as all the other cash-rich players are already fully happy with what they have. LTE (4G) is coming and from that WIMAX is no advantage anymore. Why then would they want Packet One? No angels would want either as Green Packet's business is beyond angels appetite already.

Will the current shareholders of Green Packet be able to pump in more money. Let's look at the below table and you will see they themselves are maxed as well.

The CEO's, Puan Chan Cheong and gang shares in Green Packet are already pledged (same as MTouche case). You bet they can raise anymore funds themselves for their own injections? These pledged shares are due to a rights issue done sometime in 2009. They are just not able to raise from within themselves anymore.

Having said all the above, I am still amazed at the ability of Green Packet to raise funds externally. Will they be able to keep that up? As they will need that extraordinary ability again.

Telecommunications in Malaysia - a sector not to be missed

When I thought of how much monthly expenses are spent on communication, I thought I should not miss out this sector.

I spend around RM430 a month paying these companies. Some may pay much lower, some may even pay much higher, nevertheless it is already a necessity. We use their services from voice to data (3G or High Speed Broadband), whereas for video content, we use Astro's services.




Few thoughts about this sector:

1. voice has matured, with more spending on mobile rather than fixed. Fixed line usage will continue to deteriorate;
2. data is growing, but who will be the winner ultimately. Current seems to be TM. Will they continue to grow their market share?;
3. mobile has the Big 3 i.e. Maxis, Celcom (under Axiata) and Digi. The others such as UMobile, YTL, Redtone are just passers-by;
4. this is a high capex game. Remember telcos are technology adopters not so much of a technology innovative companies. AT&T used to have Bell Labs which churned out tonnes of new technologies during the earlier days. Now this is not so - I remember Bell Labs became Lucent and now it is Alcatel-Lucent. Look at where Alcatel-Lucent is right now - almost animosity. Telcos are more of adopters today. Look at how AT&T, Verizon, even Maxis and the Singapore telcos are so reliant on Apple, Blackberry and recently Google to help them to push their 3G packages;
5. since it is a high capex game, why the smaller players bother mind-boggles me;
6. anyway I believe they are looking at the post investment effect which is the amount of free cashflow received is very rewarding;
7. all the big boys (Axiata, Maxis, Digi and TM) are fighting over the data market share. Smaller players are also putting their effort in not allowing this to be just the big boys game;
8. Will any player be able to break Astro's dominance? Is yes, when and who can possibly be the player?

The industry is gamed for exciting times (has always been since mobile became something big).
Here are some of the market cap size of companies in this space:

As you can see, the telco sector consists of around 9% of the total market cap - very significant. Now who will be the winner? - as my blog is trying to identify the better play. I will have more of the industry and individual company analysis of this sector.
See ya!