TM’s earnings downtrend to continue on stiffer competition

In June 2018, competition stiffened following regulatory changes with the MSAP implementation


Telekom Malaysia Bhd (TM) is expected to continue facing sustained pressure to its earnings in the near future as challenging operating conditions persist within the telcommunications (telco) sector with particular pressure on TM.

An analyst with a local brokerage said the firm, which last posted a year-on-year (YoY) increase in net profit in 2017, will probably post a weak fourth quarter ended Dec 31, 2018 (4Q18), results which are expected to be released towards the end of this month.

“TM won’t be showing a good set of results because they have been lowering unifi rates, so some users will migrate to cheaper plans, which would lower their ave-rage revenue per user,” the analyst told The Malaysian Reserve.

TM posted its first quarterly net loss in 10 years in 3Q18, when the group slipped into the red with a net loss of RM175.59 million versus a net profit of RM211.82 million made in the same quarter a year ago.

The net loss was attributed mainly to impairments on wireless and fixed network assets, while revenue for 3Q18 was marginally higher at RM2.95 billion against RM2.94 billion achieved the year prior.

For the nine months ended Sept 30, 2018 (9M18), the company recorded a net profit of RM83.5 million compared to the RM652.74 million profit registered the year before, while revenue dipped to RM8.73 billion from RM8.89 billion in 9M17.

The company’s last YoY increase in net profit was in 4Q17, when earnings expanded to RM277.01 million from RM154.31 million previously. Revenue was lower at RM3.2 billion in 4Q17, versus RM3.24 billion achieved a year ago.

Notably, the stronger net profit in 4Q17 was helped by a foreign-exchange (forex) gain on the group’s borrowings during the quarter, compared to forex losses experienced in the last quarter of 2016.

Year 2018 was tough for TM, as competition stiffened following regulatory changes such as the implementation of the Mandatory Standard on Access Pricing (MSAP) beginning June 8.

The MSAP is a price ceiling that determines how much wholesale network providers can charge other telcos seeking access to high-speed broadband (HSBB).

As TM charges other players for access to its HSBB network, the enforcement of the MSAP resulted in lower access pricing that in turn affected the group’s earnings.

The government also began pushing hard for faster broadband speeds at lower prices last year, which led to broadband players slashing prices, revising data quotas and even offering new packages to take advantage of customers looking to jump ship.

The fixed-broadband field, once dominated by TM, is now arguably a more open playing field.

TM was also hit by leadership departures after the 14th General Election.

Datuk Seri Mohammed Shazalli Ramly stepped down as MD and group CEO of TM on June 6 and was replaced by Datuk Bazlan Osman as acting group CEO.

In November 2018, Bazlan resigned to pursue other interests. His replacement, Imri Mokhtar, has previously served as executive VP of unifi as well as group COO overseeing business operations.

Tan Sri Dr Sulaiman Mahbob also resigned as director and chairman of TM in December 2018. He was replaced by telco veteran Rosli Man.

TM share price lost 56.89% in value in 2018 from a high of RM6.21 in early 2018, while the benchmark FTSE Bursa Malaysia KLCI fell 5.9% YoY.

However, 2019 could bring glad tidings for the stock which has risen some 9.58% year-to-date to close at RM2.89 last Friday, valuing the firm at RM10.86 billion.

Analysts believe heavily beaten-down blue chips like TM could see some relief this year, as their low trading prices make for attractive bargain hunting.

According to Bloomberg data, the stock currently has five ‘Buy’ calls, 13 ‘Hold’ recommendations and 10 ‘Sell’ calls from analysts, and is trading at 20 times its estimated earnings per share for the coming year.

Affin Hwang Investment Bank Bhd in a January report, downgraded TM to ‘Sell’ in light of higher downside risk to the group’s share price, which it said has rallied by 13% since the company’s 3Q18 results were released on Nov 26, 2018.

The investment bank noted that TM’s valuation looks pricey, at 20 times financial year ending Dec 31, 2019 (FY19), estimated price-earnings ratio, considering the difficult business environment, likely contraction in FY19 estimated core earnings and a heavy balance sheet.

CIMB Investment Bank Bhd said TM could face potential competition over the medium term as its competitors are offering packages more attractive than its existing unifi plans.

Under Tenaga Nasional Bhd’s (TNB) broadband pilot project in Jasin, Melaka, City Broadband — a fully owned TNB subsidiary  — offers the lowest broadband-only prices in Jasin.

Should TNB choose to extend its fibre services to other areas in the future, this could increase competition for TM, although CIMB Research noted that it doesn’t see an immediate impact on the group as physical network rollout would require time, while TNB’s existing fibre reach is still limited compared to TM’s.

It also said plans launched by Astro Malaysia Holdings Bhd, Celcom Axiata Bhd, DiGi.Com Bhd and Maxis Bhd are either cheaper compared to unifi, or are able to fill market gaps.