Telekom Malaysia Berhad - MANAGEMENT REPLY: What is TM Facilities’ side of the story?

2/5/2013 – Telekom Malaysia says it is now being sued for up to RM 225 mln for ending a deal to build a replica of Menara Kuala Lumpur on the island of Langkawi.

The plaintiffs, Menara Intan Langkawi Sdn Bhd and HBA Development Bhd, had first brought the case in March, claiming a loss of profit of RM 168.7 mln.

Menara Intan Langkawi and HBA Development claim that Telekom subsidiary TM Facilities wrongfully terminated a lease agreement that was signed in 2003 between Menara Intan Langkawi Sdn Bhd and TM Facilities.

According to The Star, the Menara Intan Langkawi mixed development was an 80:20 joint venture between privately-held HBA and the Langkawi Development Authority.

The waterfront project would have comprised a 308m telecom tower modelled after Menara Kuala Lumpur, a 300-room five-star hotel, a convention centre, a mall, and serviced apartments.

The tower was meant to act as the main telecommunications and multimedia broadcasting tower, catering for link-ups between Malaysia, Indonesia and Thailand.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. What is TM Facilities’ side of the story?

The announcements by Telekom Malaysia don’t go into detail as to why it terminated the lease agreement.

So, we don’t even know what Telekom is saying in its own defense.

Management reply: The case is now before the court and TM is constrained from giving further details other than what has been announced.

Question

2. No special dividend?

Telekom Malaysia declared a final dividend of 12.2 sen, bringing its total dividend to 22 sen for FY2012.

It disappointed the market when it did not announce a special dividend, despite having a cash pile of RM 3.7 bln.

This is despite the company beating analyst expectations with its Q4 results, as it recognised deferred tax income on unutilised tax incentives.

Why is it being so prudent with its cash? What is it saving for?

Well, let’s consider some factors: going into FY2013, management guided that it would recognise a higher effective tax rate of 28% (vs 22% previously).

The company is also facing competition from Maxis’ newly-launched Astro IPTV service, which raises concerns about its profit margins and earnings growth in the short term.

The management seems to be expecting margin pressure this year – it is forecasting EBIT growth rate of just 3%, compared to 6% in its FY2013 Key Performance Indicators (KPIs).

But it did not mention the rationale for its KPI numbers in the announcement.

Are there other reasons for TM’s prudent cash management?

Management reply: In line with our continued focus on value creation through continuous improvement on shareholder returns and capital management, we have announced that the Board of Directors has recommended a final dividend payout of 12.2 sen per share of approximately RM436 million, on top of the interim dividend of 9.8 sen per share amounting to RM351 million paid in September 2012. The total dividend payout amounts to 22 sen per share, or RM787 million. The payout of the final dividend, subject to the approval of the shareholders during our Annual General Meeting scheduled on 7 May 2013 is expected to be made in June 2013.

With this, TM has not only met our dividend commitment to our shareholders year after year as promised and for the first time this year, we have exceeded the RM700 million payout mark, with a total 2012 payout of RM787 million. From the date of our demerger in April 2008, our total return to shareholders (TRS) is a very impressive 237.1% making it among the best in the Telco sector.

TM announced its Headline KPIs for 2013 consisting of revenue growth of 6%; EBIT Growth of 3%; and customer satisfaction measure of 72. Over the past few years, TM’s annual revenue growths have surpassed the Malaysian GDP and the domestic market growth. It was driven primarily by strong growth in broadband and data, largely from the mass market segment comprising residential customers and the SMEs, led by our UniFi triple-play services. At 6-7% revenue growth target, it is still stronger than the domestic Telco market growth, which averaged at around 4% per annum. The Company decided to change the measures to EBIT Growth (%) partly to streamline external measures internally. EBIT measures overall operational efficiency and it includes capex or asset efficiency through depreciation charges, asset write off and asset impairment. With customer projects moving towards service business model, where TM invests in capex and / or owns these dedicated customers’ assets and provides end-to-end services or solutions for these customers, it is more relevant to use EBIT as the measure. In addition, TM is currently moving steadily into new business opportunities such as ICT, Business Process Outsourcing (BPO) and New Media, and not just pure connectivity services. These products and services have lower EBIT margin (%) compared to pure connectivity services. Focusing on absolute EBIT growth will shape the right decision making behavior across the Group and bring higher value to our stakeholders.

[Note: Malaysian GDP forecast 2013 at 5.6% (source:MIER); Telco market outlook 2011-2015 at CAGR of 4% (source:IDC)]

We recognise that competition is going to be more intense this year, particularly in the retail broadband space, with more players offering their home broadband products. This is something we cannot avoid; with more telecommunications providers deploying new products and services into the market such as the LTE 4G services, the rapidly evolving technology and range of services associated with telecommunications. However, we are poised to face those challenges, and at the same time, ready to seize any opportunities that may arise from this, such as to capture the growing demand in network services, with our robust infrastructure and unparalleled capabilities. We will continue to push our UniFi services in HSBB areas and apart from that, we have also made Streamyx 8Mbps service available in areas not covered by HSBB to meet the demands of customers for higher speeds service in non-HSBB areas.

As we have always said, we welcome competition as it will foster more innovative services and the ultimate beneficiary will be the end users/consumers as entrants of new players provide them with options depending on their needs and requirements.

We welcome all new IPTV providers that will offer a wider selection of entertainment choice to Malaysians. We aim to provide the best for Malaysians. In differentiating ourselves against the competition, TM is definitely looking at all options right now. One interesting position where we can put ourselves in right now is to make TM "an aggregator of aggregators", which is very much in line with what we do in HSBB – be an infrastructure provider to other service providers as well.

As for our IPTV service – HyppTV – the service offering has been further improved, not only with more channels, but also the recent introduction of three (3) new packages as part of our efforts in providing our viewers with more value and enhanced viewing experience. The 3 newly-introduced packages bundled Sports, Entertainment, Asian and Edutainment channels, and named as HyppTV Mega Pack, HyppTV Sports Pack and HyppTV Platinum Pack, in addition to the HyppTV Ruby Pack which has been launched in January this year.

With the open nature of HSBB as mentioned, other broadband providers are both our customers and our competitors.

Via our wholesale business arrangement in which TM provides HSBB (Access) and HSBB (Transmission) services, they become our wholesale customer but at the same time, we also compete in the retail market. This makes for not only healthy competition in the market but also for healthy industry development with the increase in collaborations amongst service providers.

In addition, via the HSBB project, TM, together with the Government, in collaboration with industry players and MDeC, have developed a neutral platform – Content Service Delivery Platform (CSDP) to act as an online end-to-end digital marketplace where content and application providers alike will commune to offer their services/content/application and buyers or brokers will use the same platform to connect with the producers.

The platform, launched in June 2012, is called My1Content to further boost multimedia content development within Malaysia. We are collaborating with various Government Agencies to push content development and help local Contentpreneurs gain market access to the World. In short, this new platform will enable TM to be the ‘Aggregators of Aggregators’.

With this ecosystem, TM not only hopes to spawn waves of local content innovation but also to position Malaysia as the regional content hub. Our CSDP – My1Content – will spur local content and application hub growth among producers, increase content-related transactions and increase the demand for bandwidth among the consumers.

Besides that, with IP-based technology, IPTV allows more rich content and applications to be broadcasted via our platform, creating an Internet walled garden environment. Such advantage gives opportunities to Content Providers, both local and international, to leverage on our platform to promote their content via our HyppTV service.

These industry collaborations in many areas of infrastructure and services are facilitated by the regulatory environment and are for the ultimate benefit of the Malaysian consumers in terms of the range of service and package options open to them.

TM, as Malaysia’s broadband champion, will continue to strengthen our position as a neutral wholesale service provider keeping our promise of open access of our HSBB network infrastructure to all MCMC-licensed service providers.

Towards this end, we will focus on executing the Performance Improvement Programme (PIP) 3.0 which we have announced earlier this year that is on Continued Growth, Fundamental Productivity Shift and Improving Institutional Health Drivers.

Question

3. What is Telekom Malaysia doing to position itself against the competition, and to ensure that UniFi’s subscriber base continues to grow?

Probably the most encouraging part of Telekom Malaysia’s recent earnings announcement is that UniFi (fibre optic) subscriber growth is strong.

Despite the customer base for Streamyx experiencing a slight drop of 1.1%, UniFi maintained its double-digit growth with an additional 56,000 subscribers during the quarter.

Its total base has now exceeded 514,000 subscribers.

Most analysts believe UniFi’s momentum will slow down due to competition from mobile telco players in the home fibre broadband space.

This comes first in the form of Maxis’ Astro IPTV service, which will compete based on pricing and content, especially the sport channels.

What is Telekom Malaysia doing to position itself against the competition, and to ensure that UniFi’s subscriber base continues growing?

Management reply: It has been a tremendous year in 2012, and indeed a tremendous journey since we built the high speed broadband infrastructure. Last year, we surpassed the commitment set out in the Public-Private Partnership agreement with the Government of Malaysia under the high speed broadband project. To date, TM has activated over 548,000 UniFi subscribers on the back of 1.39 million premises passed covering 102 exchanges, which translates to a take-up rate of more than 38%, going beyond global benchmarks of similar service roll-outs. This in part has led to a revenue growth of 9.2% for 2012, leading the industry and the highest since our demerger.

TM is Malaysia's Broadband Champion, a name that stands for trust, backed by years of experience, collective expertise and most extensive and sophisticated IP-based network infrastructure. TM will focus on strengthening its position further by continuing to enhance the service experience of its customers through continuous customer service quality improvements and innovation, while focusing on increased operational efficiency and productivity to provide for the needs and expectations of a growing digital lifestyle that is increasingly being adopted by Malaysians. These efforts will be spearheaded by our continuing network migration (Internet Protocol (IP) Next Generation Network) and improvement efforts, introduction of new products and services as well as customer service enhancements.

With an incredible range of lifestyle-changing innovative services comprising compelling content and high speed connections, be it Streamyx or UniFi for homes, TM WiFi hotspots for out of homes and complete end-to-end value creating solutions for businesses, TM offers faster, richer and a more reliable customer experience in delivering an enhanced and integrated digital lifestyle to all Malaysians. Whether for entertainment, information or communications, we help our customers to connect, communicate and collaborate. Our customers can count on us to deliver.

TM is keeping abreast with the changing and increasingly sophisticated customer behaviours who want to experience the same service regardless of the devices or technologies serving them. There are many exciting products and services developments being planned focusing on lifestyle benefits to make life easier for consumers and businesses; beyond their homes and offices, collapsing the boundaries of time, space and distance, in our holistic approach to providing ubiquitous broadband services across all segments.

Our IPTV service, HyppTV, is currently Malaysia’s fastest growing IPTV service, offering a total of 107 channels with 20 channels in High Definition (HD) - consisting of 72 premium linear channels, 15 Video-On-Demand (VOD) genres and 20 interactive channels. Specifically for business customers, TM introduced HyppTV for Business as an optional part of the UniFi BIZ package, making it a triple-play offering - a feature previously only made available to residential customers - to enable the SMEs to further enrich their businesses with exciting infotainment experience.

HyppTV provides TV viewers a brand new TV experience – enjoy entertainment and other programs at your own time. We will eventually make our offerings will also go beyond TV screen. And as per our HyppTV slogan, Primetime, Anytime, Everytime and we will also add ‘Everywhere’ to this tagline as we want to offer our services on multi-screen or devices.

HyppTV differs from other pay TV operators in terms of its pricing model, which is a combination of subscription and a true on-demand approach. HyppTV is the only pay TV provider in Malaysia that offers a true a-la carte programming model with competitive pricing. HyppTV subscribers pay only for the channels, movies or series they want to watch. The viewing experience from HyppTV service will change viewers’ perspective on their content viewing in the future. Quality service is of utmost importance in our HyppTV offerings with remarkable picture and sound quality.

Further to this, we have created ‘value for money’ package offerings including 3 newly-introduced packages mentioned earlier – HyppTV Mega Pack, HyppTV Sports Pack and HyppTV Platinum Pack, in addition to the HyppTV Ruby Pack which has been launched in January this year.

HyppTV Mega Pack is our latest blockbuster offering that consists of 47 HyppTV channels including 8 Video On Demand (VOD) channels and 12 High Definition (HD) channels, priced at RM50 a month. With the theme "family" in mind, this pack bundles various HyppTV channels from Entertainment, Lifestyle, Edutainment and News content, making it a complete pack for the whole family. Meanwhile, with HyppTV Platinum Pack, customers are able to view 33 Premium channels for just RM30/month, which comes to less than RM1 per channel/month.

Given the big demand for Sports entertainment, we broke the Sports content barrier last year, with the introduction of our dedicated and live sports channels, HyppSports HD and FOX Football Channel – bringing the best in American sports such as the National Football League (NFL) and National Hockey League (NHL) as well as UEFA Champions League and UEFA Europa League live matches to the living rooms of Malaysians. Malaysians are able for the first time now, to view four (4) UEFA Champions League and UEFA Europa League matches live in HD simultaneously.

To avid sports fan, there’s HyppTV Sports Pack for you which bundles 12 HyppTV Sports channels and priced at RM30 a month. It is the first Sports channel package on HyppTV that brings you a collection of never before seen sports programmes as well as live sporting events come rain or shine.

We are very encouraged by these blockbuster package offerings and plan to offer more such flexible and exciting deals to meet the lifestyle needs of our customers in the very near time frame. Keep a look out on our upcoming announcement soon.

We thank management for its response


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