2016 and 2017 will be capex-heavy years: TM

  • Allocating 25-30% of 2016 revenue as capex, amount could hit RM3.6bil
  • Fixed-line giant expects mobile subsidiary P1 to be stable by 2018
2016 and 2017 will be capex-heavy years: TM

TELEKOM Malaysia Bhd (TM), Malaysia’s largest fixed-line operator, will be embarking on an aggressive capital expenditure (capex) plan over 2016 and 2017 as it aims to widen its high-speed broadband and mobile footprints.
TM, 28.5% owned by the country’s sovereign wealth fund Khazanah Nasional Bhd, has been allocating between 16.3% and 21.4% of its annual its revenue as capex over the past three years, amounting to investments of RM1.8 billion to RM2.5 billion annually. [RM1 = US$0.24 at current rates]
While the company did not disclose the absolute amount it plans to invest, it did reveal that it would be looking to allocate 25-30% of its revenue as capex this year.
The last time it spent over 30% of revenue on capex was in 2010, when it allocated 30.8% or RM2.7 billion.
The bulk of the capex will be used to build out its wireless network business under subsidiary Packet One Networks Malaysia Sdn Bhd (P1), in which it acquired a majority stake in 2014, as well as to roll out its High Speed Broadband Phase 2 (HSBB2) and Suburban Broadband (SUBB) projects.
“In terms of capex, we will continue the programmes and projects that we have already started, mainly HSBB2 and SUBB,” said TM group chief executive officer Zamzamzairani Mohd Isa.
“Secondly, there’s the heavier investment in the P1 rollout – this is an investment year for us, we will see heavier capex this year than last,” he told a media briefing in Kuala Lumpur on Feb 25.
The company is also aiming to grow its revenue by 3% to 3.5% this year, and to maintain its earnings before interest and tax growth of about 13%. These headline key performance indicators (KPIs) are excluding P1’s numbers.
Should the group grow its revenue by 3.5% this year, this would also mean that its 2016 capex could reach as high as RM3.6 billion. 
While Zamzamzairani did not provide guidance on what the 2017 capex would be, he did say that 2016 and 2017 would be “peak years” for TM in terms of capex.
One reason why 2016 and 2017 will be capex-heavy years is that this would be the first time TM’s investments into HSBB, SUBB and P1 will be accounted for on a full-year basis.
“I think as we move towards the second half of the year, when we roll out some of these services, we will be in better position to give you estimates on capex spent,” TM group chief financial officer Bazlan Osman told the briefing.
The capex will be funded via TM’s internally generated funds, as well as borrowings, he said.
“We have two facilities that we can draw down: One is a US$750-million facility, while the other is a RM1-billion facility,” he added.
P1: Unpolished diamond or a drag?
In its full-year financial results for 2015, TM reported that revenue jumped 3.4% to RM11.72 billion, while pretax profit and net profit fell by 17.5% and 15.8% to RM911.8 million and RM700.3 million, respectively.
The decline in earnings was partly due to the strengthening of the US dollar, resulting in foreign exchange (forex) losses. About 12% of TM’s borrowings are in US dollars.
Another reason for the decline was its P1 business, which is still in the red. Excluding P1, TM would have registered a 7.3% and 2.9% increase in pretax profit and net profit to RM1.25 billion and RM891.7 million, respectively.
Although P1 appears to be dragging down the group’s overall performance, Zamzamzairani remained optimistic about the mobile business’ potential.
“This is a major undertaking for us. Mobility is a new adjacent space for us. Of course, it will require time to build up.
“This year, we will be launching our mobility services. Once we launch, we will also take time to grow,” he said.
TM had initially expected to launch its mobile business by the end of 2015, after having launched its TMgo wireless broadband offering in select regions in late 2014.
2016 and 2017 will be capex-heavy years: TMCurrently, the company sees its business in two parts: One is the bread-and-butter fixed-line business, the other is its mobility business.
This also explains why the company has two sets of financial numbers for investors – one that shows how the company performs when the P1 business is excluded, while the other set includes P1’s impact.
“We are looking at our business in two parts. One is to make sure the current business is growing, while the other is to make sure our investment in future growth is done efficiently,” said Zamzamzairani.
“Right now, if you combine both parts, the number is skewed. When P1’s business is more stable, which we estimate to be by around 2018, then we can look at it as a totality,” he added.
TM believes that P1 would play a critical role in transforming it from being just a fixed-line operator, and into a proper converged service provider.
Having P1 in its portfolio means it would be in a position to offer consumers both fixed-line and mobile services, and perhaps even bundle them in value-for-money packages.
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