Fitch: Telekom Malaysia Facing Increasing Data Competition
Published on: 31st May 2013
By: Ian Mansfield
Fitch Ratings says that Telekom Malaysia will face higher competition in the fast growing increasingly important data segment in 2013. While they do not expect this to threaten its credit rating over the next two years if competition causes margins to decline and or other factors lead to (FFO) adjusted net leverage falling below 2.0x (current expectations 1.5x 1.7x) the ratings may be downgraded.
Competition in the Malaysian data segment will intensify as eight LTE spectrum owners, which won spectrum in December 2012, will launch services in 2013. Also, the 'resellers' - operators who lease capacity from TM on fibre-based high speed broadband network (HSBB) network and market to retail and business consumers - are likely to compete on price to gain market share. Leading wireless operators including Maxis and Axiata have already reduced data tariffs and are likely to keep LTE pricing the same as 3G data pricing, heightening competition further.
Our base case assumption is that TM, the leading fixed-broadband operator and owner of country-wide fibre-based network, will be able to retain its profitability. However there are downside risks if data competition intensifies further, which could negatively affect TM's overall profitability. TM's 2013 cash generation should be sufficient to fund its capex and dividends commitments and operating EBITDAR is likely to grow in line with revenue growth of 5%-6% to MYR3.5bn-3.6bn as TM adds high speed broadband (HSBB) customers.
Fitch said that it expects TM's operating EBITDAR margin to remain unchanged at 33%-35% as growing economies of scale in the HSBB segment should offset a greater competition in the data segment. TM will gain an average of 10,000-15,000 HSBB customers per month during 2013; about 40% will be new customers, while the rest will have migrated from TM's traditional broadband service. Adding HSBB consumers will benefit overall profitability as the customers' monthly average revenue per user (ARPU) of MYR170-180 is much higher than for its traditional voice (MYR30-35) and internet business (MYR78-82).
Fitch forecasts that TM's 2013 capex/revenue will be about 24% (2012: 25%) but will fall to 20-21% from 2014 as the bulk of the HSBB network expansion will be completed. Our rating assumes that TM continues with its normal dividend policy of minimum MYR700m or 90% of its normalised net income; a higher payout not justified by better performance would damage credit metrics. During 2008-2012, special distributions totalled MYR5.7bn, as TM returned the sale proceeds of its stake in Axiata Group Berhad and of other non-core assets to shareholders.
During 1Q13, TM's revenue and EBITDA grew 2% and 3% respectively yoy in line our expectations. TM' 1Q13 operating EBITDAR margin expanded by 40bp to 35.2% (1Q12: 34.8%) as the number of its HSBB customers increased to 532,000 (2012: 483,000) and the company maintained its HSSB ARPU at MYR178 (2012: MYR180).
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