Thursday, August 23, 2012

Time Dotcom: Fiber is the future

Let's face it, despite the uneasiness on how the Time Dotcom's (TdC) deal was crafted out, this is a changed company. It has gone from a boring, old, overstaffed, lack of leadership and direction type of company to something of a challenge to Telekom Malaysia (TM). It has a young CEO, a small Board (I do not like large Board), healthy Balance Sheet and a cashflow positive company now.

Despite that, is TdC up to the challenge against TM? Remember, TM may still have the symptom of an old TdC, as it is a much bigger company but its focus on fiber and with a breathe of fresh air from some of its new management people, this giant has sort of awakened - thanks to a large part from the help of government's fund (or rather our fund) for the HSBB rollout, as well.

Will TdC being the second largest in terms of providing wholesaling of bandwidth be able to compete? Now, let's look where it is heading in terms of what it does. This is what it says it provides from its website:

"As a data-centric operator, TdC’s business is anchored at providing backhaul and wholesale bandwidth solutions to leading local, regional and global operators. The Group also offers extensive fibre optic-based telecommunications services to large corporations, government organisations and enterprises that demand uncompromising reliability. Within the consumer space, TdC offers 100% fibre-based broadband services." 

Sounds confusing? - it does, which is why it is not getting much followings despite the change in management and focus. Basically to explain, it is a company that looks at multiple ways into providing the highway to the telcos (Maxis, Digi, Celcom, Green Packet or even regional telcos), while these telcos concentrate on building the smaller roads, retailing, marketing and billing system.

If we look at it, as mentioned, its main challenger is TM with the mobile players themselves building their own roads as well. Does this mean TdC has quite some competition? Yes, however as with the new team, it concentrates on doing what it thinks it knows best which is providing a better highway than the rest. With that, and considering that the number of players in this area are still not that many (due to size required, cashflow and licensing), TdC has a targeted role to play.

Just look at its financial summary below for its performance for the last 4 years.

The new management took over the business in October 2008. As you can see, large write-offs were done in 2008. From then on, major VSS was done to reduce its operational costs as the group was involved in all kinds of telco-related businesses which were largely unprofitable.

While revenue was not growing much at all, its restructuring was good enough for the company to see very nice profits growth.

You will notice that I have pulled out "Income from Investments" from the financial statement. This is due to its holdings in Digi which it now owns 275 million shares worth about RM1.35 billion now. While this is very substantial to the group, the holding should not be looked at a measure of the group's performance. (Remember Digi issued 5% of its shares to TdC for the 3G license few years ago.)

For the valuation of TdC, I would like to put a 20% discount on the value of Digi. Why? We have no direct holding on Digi. If we are to put the full value, we might as well buy Digi direct.

At its current price of RM3.41, the market value of TdC is now RM1.95 billion. Deducting Digi's value of RM1.078 billion after the 20% discount given, TdC's business is being valued at around RM870 million. (Get over the valuation that TdC gave (RM337 million) for its purchase of AIMS and GTC.) Are TdC's businesses alone worth RM870 million?

What would the new acquisitions of AIMS and GTC be contributing to TdC's bottomline? An extra 20% to 30% in terms of profit (ex-dividend from Digi). Now, with that I would think TdC would be able to hit almost RM100 million PAT (before Digi's contribution) a year. On top of that, it has some great assets which the group is continuing to reinvests into.

I feel that TdC, with its concentration on being a wholesaler, though not fantastically sweet, it is doing the best it could with what they have with the existing competition. It has let go of the B2C business which is vastly competitive. Currently it is concentrating into providing pipes as backhaul (and other hosts of services) for the telcos, which I think is the right decision. And importantly, at its current market value of RM1.95 billion together with its holdings of 275 million Digi's shares, I think it is attractive. On what angle?

If you look below, the TdC's sweet spot are the potential growth of data revenue as well as its tie-up with Astro into providing Astro's B'yond IPTV. To a certain extent, as I have mentioned in an earlier article on Astro, the future is going to be delivering content via fiber pipes not satellites. As Astro is now a direct competitor to TM, it may not yet want to rely on TM's fiber, but TdC's. Hence, revenue from selling these pipes to home can be a significant revenue growth to TdC although these are yet to contribute as of now.

What about depreciation? Importantly, as seen below, it has not carried much assets anymore in the books as we do not want to be surprised by large write-offs in future.

With that, I have bought a small quantity of 2,100 units at RM3.41.


Bn911 said...

Hi Felicity, may i ask u something, this Time dotcom ROE rather low rite which is less than 10, will u take ths into consideration? Thx ya~

Bn911 said...

Return on Equity - 5 Yr. Avg -11.71

felicity said...

Hi Benson, the ROE is low due to its shareholding of Digi. If you take that out, is a lot higher. The investment value in Digi is more than RM1.1billion.

Bn911 said...
This comment has been removed by the author.
Bn911 said...

Mean ROE tht we always c in report cant be use as useful guide to evaluate a company?

felicity said...

can use just that in time there are 2 areas of business which contributes the profitability - investments (Digi) and operating profits from its own business. The rquity is inclusive of the investments, hence we have to take that out.

khengsiong said...

I heard that some of the new LTE networks will use Time's fiber to connect to the base stations. That would be good for TdC.

felicity said...

Yup some will want to look for alternatives as the sharing model works well for TM but not the other players. In fact, using TM as the HSBB initiator is a flawed model.

eKimkee said...

Felice, I just wonder how you get RM1.95 billion of market value for Time DotCom?
Initially I thought it should be RM2.53 billion from the latest QR.

felicity said...

it has 572,070,591 shares. Par Value is RM0.50. total market cap or value is then

572,070,591 x RM3.41 = RM1.95 Billion


eKimkee said...

You are right, Felice. I refer to OSK report and it stated RM1,945.04m market cap with 572.07m shares.

But I still don't understand why the annual report 2011 stated 2,530m shares @ RM1 each. How to calculate actually?