TM enters new chapter with entry into 4G LTE spectrum

With the acquisition of Packet One Networks (Malaysia) Sdn Bhd (P1) likely to be concluded in this month, Telekom Malaysia Bhd’s (TM) entry into the 4G LTE space represents a new chapter for the company whereby the group can finally offer convergence of fixed and mobile internet services.

According to the research arm of TA Securities Holdings Bhd (TA Research), it expects TM to benefit from market share gains via its unique bundling of Fixed High Speed Broadband (HSBB) and Wireless Broadband (WBB) services, which is currently not offered by competitors.

“We believe the combination of high-speed reliable fixed services, coupled with the convenient mobility of WBB will enhance the appeal of TM’s products,” TA Research opined.

It is optimistic that TM is able to achieve success with this new bundle given TM’s strategic advantage in owning both resources for transmission of mobile 4G, ie 850 MegaHertz (MHz) and 2.6 GigaHertz (GHz) spectra, and fixed HSBB (fiber optic cables).

To kick-start its rollout of 4G, the research arm noted that TM launched its LTE WBB service, namely TMGo in August 2014.

It pointed out that for the time being, this service is only available for prepaid users at rural areas in Kedah (Pendang) and Melaka (Melaka Tengah).

“We believe that TMGo is meant for the rural community whilst P1 is targeted at commercially viable areas with high population density (i.e. Klang Valley, Penang & Johor),” TA Research said.

Given MCMC’s approval to use 850MHz outside of Universal Service Provision (USP) areas, the research arm anticipates that P1 will transmit 4G using TM’s 850MHz (FD-LTE) and P1’s 2.6GHz (TD-LTE) spectrum.

It noted that the combination of both spectrums allows maximum capital expenditure (capex) efficiency on the back of lower tower requirements.

On to Unifi, TA Research does not discount the possibility that TM may bundle WBB services with Unifi in future when TM/ P1’s 4G infrastructure is finally ready for deployment.

“When this happens, we reckon that it makes commercial sense to merge P1 and Unifi to one single product to avoid cannibalisation and confusion amongst consumers.

“Given the latter’s stronger brand equity, we opine that it would be wiser for TM to retain Unifi’s brand name,” the research arm opined.

Nevertheless, it noted that this would depend on TM’s arrangement with P1’s other stakeholders, Green Packet (30 per cent) and SK Telecom (13 per cent).

In terms of the large screen data segment, TA Research believes that TM’s focus in that segment is more beneficial given that the WBB space is less competitive and crowded.

“We understand that mobile players have intentionally diverted their focus to small screen data, which carries higher margin and is easier to monetise.

“Furthermore, mobile data users are experiencing a surge in growth due to climbing smartphone penetration,” the research arm noted.

It pointed out that this resulted in capacity overload at mobile networks and therefore, cellular providers prefer to sacrifice high usage WBB users to ease network capacity.

“As such, we believe that TM may effortlessly establish its niche in the WBB segment despite being a new market entrant,” it opined.

Regarding P1’s venture into the mobile screen segment, TA Research believes that this will likely take an extended time to unfold.

It added that this is given that smartphone users require the combination of voice + data services.

“However, P1 and TM lack mobile voice capabilities at this stage whereby the latter only has mobile voice transmission at limited USP areas using 450/850MHz.

“Furthermore, TM and P1 do not have sufficient tower sites currently to achieve reliable nationwide voice coverage,” it pointed out, adding that currently, P1 merely owns 2,000 sites nationwide with population coverage of circa 50 per cent.

The research arm highlighted that echoing P1’s aspirations, TM does not discount ultimately offering mobile voice services via Voice over LTE ( VoLTE) services.

“Similarly, we believe that this will not materialise over the near term,” TA Research opined.

It noted that this is given that VoLTE technology is still at its infancy stage, although it has been launched at advanced overseas markets, including Singapore, with limited coverage.

“Therefore, if TM/P1 intends to offer voice services in the near term, we believe it is more viable for TM to lease network capacity from mobile players whilst P1 builds up its arsenal of towers.

“We believe a collaboration between Celcom Axiata Bhd ( Celcom) and TM is possible given that Khazanah is a common substantial shareholder,” the research arm said.

Meanwhile, it pointed out that management indicated potential partnership with other players to provide mobile voice roaming services.

Overall, TA Research does not expect P1 to be earnings accretive in the near term given that TM needs time to clean-up P1’s balance sheet and beef-up operations.

The research arm estimates that consolidation of P1 will result in EPS dilution of four per cent/ four per cent for TM in financial year 2015/2016 (FY15/16) before turning around in FY18.

“For our estimates, we assume that P1 will utilise 20 per cent (RM330 million) of proceeds from its CB to pare down borrowings in FY15-16.

“We also make the assumption that the balance 80 per cent of convertible bond (CB) proceeds will be used as 4G capex over 2015-17,” it projected.

All in, TA Research has maintained earnings estimates pending finalisation of the deal and its ‘buy’ rating on TM with unchanged discounted cash flow-derived (DCF-derived) target price of RM7.42 per share.

“TM’s long term prospects appear rosy, following its game changing acquisition of P1 which enables the group to achieve convergence of fixed and wireless services.

“This enables TM to remain relevant in the digital age whereby users expect fast, convenient, portable, and reliable internet connections,” the research arm concluded.