A better way to measure telcos is ROCE or ROIC
This comes as Axiata sees EBITDA margin fall
INDUSTRY observers and analysts should not be focusing too much on a telecommunication company’s margins, as this is becoming a misleading performance indicator, according to Axiata Group Bhd president and group chief executive officer Jamaludin Ibrahim (pic).
“Margins is becoming more and more misleading. In fact, I believe that it is becoming very misleading now. Analysts’ focus shouldn't be on margins too much,” he told (Digital News Asia) in Kuala Lumpur recently.
Axiata’s EBITDA (earnings before interest, tax, depreciation and amortisation) margin has been on a downtrend recently.
For the nine months ended Sept 30, 2014, its EBITDA margin fell to 37.6%, versus 40.1% in the first nine months of 2013.
The decline was mainly driven by poor performance from its two biggest subsidiaries, namely Celcom Axiata Bhd and PT XL Axiata Tbk.
During the nine-month period, Celcom’s margin fell by 1.3 percentage points to 43.1% (versus 44.4% a year ago). During the third quarter itself, its margin fell to 41.8% from 44.6% in the third quarter last year.
The decline in Celcom's margin, as well as its revenue and earnings, was mainly driven by its IT transformation programme. The company also faced IT system issues, and this has affected its capability to launch new products in a speedy manner.
Meanwhile, Axiata’s Indonesian operation XL Axiata suffered a bigger margin decline.
During the nine-month period, its EBITDA margin fell to 35.9% from 40.4% in the same period a year ago. During the third quarter alone, its margin fell to 34.1%, versus 40.7% in the third quarter of 2013.
Why margins not the best measure
Jamaludin argued that there are a few reasons why margins are not the best way to judge a company’s performance, with one being that different telcos calculate margins differently.
“It can be misleading. In Indonesia, when comes to margin, it is gross profit divided by net revenue. So the denominator is smaller, because to get net revenue, you need to minus interconnect revenue,” he said.
Another reason is that telcos in many countries are starting to sell more and more of their tower assets.
“When you sell towers, you save capital expenditure (capex), but you pay in terms of operating expenditure (opex). So Indonesia will lose about 2-3 percentage points because we converted from capex to opex,” he added.
While Jamaludin said that the plan to dispose tower assets will hurt margins, he admitted that it is not the main factor why XL Axiata’s margin declined this year.
The main reason that XL Axiata experienced lower earnings and margins is because of the negative contributions from Axis, a company it merged with this year.
“Of course, foreign exchange loss is also another reason why XL Axiata suffered,” he argued.
For the nine months ended Sept 30, 2014, XL Axiata registered a net loss of 901 billion rupiah versus a net profit of 917 billion rupiah same period last year. [1,000 rupiah = US$0.08]
What’s the better indicator then?
In the interview with DNA, Jamaludin shared his opinion on why a “10% margin can be better than a 40% margin.”
“One good example will be our international wholesale [business]. Our international wholesale margin is very small, ranging from 5% to 15%, but our capex is almost nothing.
“However, in the mobile business, I can get a 40-50% margin but I use a lot of capex,” he added.
Jamaludin said that a better indicator to judge Axiata would be via return on capital employed (ROCE) and return on invested capital (ROIC).
“That’s why we are using a lot of [metrics] like ROIC and ROCE. Despite the total investment being so small, the fact that I can have a 10-15% margin is very healthy. This is because there is no capex involved.
“Margins is just an opex measurement. It doesn’t take capex into account.
“That's the message we are trying to send analysts. Even ROIC is not perfect, but it is better than EBITDA margin,” Jamaludin added.
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