Fast-tracking growth by acquisitions?
Ng Wai Mun 
Digi CEO Albern Murty said Q3FY17 was a strong quarter for the company

With the local mobile telecommunication industry reaching saturation point, it is a daunting challenge to sign up new prepaid and postpaid subscribers.

Hence, “prepaid king” Digi.Com Bhd has an uphill task staying ahead of the game. One strategy could be attracting subscribers from its rivals rather than creating new ones. Another option is to fast-track growth through acquisitions.

To be fair, other telcos are also facing similar challenges. Industry players say the prepaid segment is facing challenging times with subscriber identification module (SIM) card consolidation and a falling foreign worker population, most of whom opt for prepaid over postpaid subscriptions. Moreover, companies like Google, Skype and WhatsApp are competing with telecommunication companies (telcos) by offering similar services.

In the first quarter of 2015, Digi captured “prepaid king” title by attracting 9.9 mil subscribers followed by Celcom Axiata Bhd with 9.5 million subscribers. Today, it still leads the pack.

Despite the challenges, Digi expects modest growth in its subscriber base next year. “This is in line with the country’s population growth,” a spokesman tells FocusM.

However, analysts are cautious on its prospects. Affin Hwang Investment Bank Research has projected Digi’s revenue to dip 4.5% in its financial year ending Dec 31, 2017 (FY17), with MIDF Research projecting a 1.8% drop.

Hong Leong Investment Bank Research is more pessimistic, expecting Digi’s revenue to decline 4.7%. In his report on Digi, BIMB Securities Research analyst Annuar Rahman has projected the telco’s revenue to fall 7% to RM6.1 bil in FY17 and a further 4% to RM5.9 bil in FY18.

The research house has placed a target price of RM4.70 on the counter. MIDF projected a higher target price of RM5.02 but Affin Hwang’s projection is lower at RM4.74. Digi’s shares traded at RM4.76 on Dec 7.

For the quarter ended Sept 30 (Q3FY17), Digi’s revenue fell 3% year-on-year (yoy) to RM1.57 bil, the third consecutive year of lower Q3 revenue. For its nine-month period, revenue fell 5% to RM4.7 bil, also the third consecutive year of lower revenue.

Nonetheless, when the Q3FY17 results were released, Digi CEO Albern Murty said: “This was a strong quarter for us, reflecting that we have been disciplined to execute well against our business priorities to deliver earnings growth, steady margins with lower expenses. These results were driven primarily by organic growth from our strategy for the past several quarters, centred around providing customers a quality experience on the best 4G Plus network, complemented by great value offerings.”

Data compiled by the Malaysian Communications and Multimedia Commission (MCMC) showed that the number of mobile subscribers in Malaysia peaked at 45 million, almost three years ago in Q4 2014. Since then, the telcos’ respective subscriber bases have been experiencing a freefall at different rates.

However, despite the increasingly tough operational environment, Digi increased its market share in both the prepaid and the postpaid segments. Albern had said the company had decided to aggressively push to increase its postpaid business.

Securing higher market share is one thing as the battle is only half won. In this saturated, highly competitive mobile telecommunications sector, sustaining current positions and ensuring growth are huge challenges not only for Digi but also its rivals.

Most analysts and investors feel the industry has peaked and doubt the 45 million mark will be hit again anytime soon. They wonder where growth will be coming from, especially when telcos are generally experiencing declining average revenue per user (ARPU) in the past few years.

“Despite the various promotions (in the past few quarters) to boost revenue, efforts had not reaped the desired results,” says a regional analyst. He believes the only way for the mobile players to grow substantially is by acquiring other telcos.


Dividend payouts

He explains the pressure is on the telcos to sustain acceptable dividend payouts for shareholders. As mobile subscribers had peaked in 2014, he says: “It is not a coincidence that Digi’s dividend per share started sliding in 2015.”

From a total of 26 sen per share in FY14, its dividend per share fell 15% to 22 sen in FY15 and another 5% to 20.9 sen in FY16.

Even then, the analyst says: “To minimise the decline in dividend per share, the company tried to maximise its payout in FY16 by giving out a dividend equivalent to a higher 99.5% of its net profit.” Its FY15 dividend was marginally lower at 99.3%. Digi has a dividend policy of distributing a minimum 80% of its net profits.

Declining dividends are not only confined to Digi as Maxis Bhd’s dividend per share also fell from 40 sen in FY14 to 20 sen in FY15 and FY16.

On Digi’s plans to turn around its declining revenue, the spokesperson says its mid-term strategic priorities remain unchanged, which are to focus on growing its postpaid business anchored on its strong 4G+ network proposition and driving its prepaid internet growth. In highlighting its recent Q3FY17 performance, the spokesperson says Digi has made promising headway in growing its postpaid and stabilising prepaid revenue.


Digi new ‘prepaid king’

Latest MCMC data showed that total mobile subscribers stood at 42.8 million as of Q1 2017, the sixth consecutive quarter of decline yoy. The decline was due primarily to falling prepaid mobile subscriber numbers over the past seven quarters.

When the number of mobile subscribers peaked at the end of 2014, Celcom was the “prepaid king” with an estimated 28% market share followed by Digi and Maxis with 26% share each. Digi emerged as the new “prepaid king” at the end of Q1 2015, due solely to its prepaid subscriber base contracting the least since 2014 in terms of percentage and absolute numbers, compared with Maxis and Celcom.

The regional analyst doesn’t buy the argument that subscriber growth henceforth will be in line with the country’s population growth. “If that could happen, it would have happened in 2014 and 2015,” he says.

He also does not believe lower prepaid subscriber numbers were due primarily to a reduction in the number of foreign workers the past two years. He says the number of foreigners in the country has been growing faster than Malaysians.

Based on the 2010 population census, there were 26 million Malaysians and 2.3 million non-Malaysians, giving a total population of 28.3 million. The Department of Statistics numbers revealed that as of end Q3 2017, the population of 32.2 million comprised 28.8 million Malaysians and 3.4 million non-Malaysians. The compound annual growth rate (CAGR) of Malaysians was 1.7% but non-Malaysians was much higher at 6.6%. The analyst believes the bulk of these non-Malaysians are blue-collar workers.

Ong says mobile subscriber numbers are hard to pin down

On whether the total number of mobile subscribers will increase anytime soon, Boston Consulting Group senior partner and managing director Ong Ching Fong says: “The number of total mobile subscribers is a hard number to pin down. It depends on how mobile telcos are reporting the data, especially the top three telcos versus the ‘attacker’ mobile telcos such as U Mobile and Webe. It is also impacted by how often consumers change their prepaid SIMs, e.g. the rotational churners.”

In the short term, he says there is some real reduction due to weaker consumer sentiment brought about by the weaker ringgit, goods and services tax (GST) and other factors.

“In the long run, mobile is an essential service that will continue to grow.

“Some technology change can impact the growth of mobile subscribers such as ubiquitous WIFI access and the Internet of Things (IoT). The question is less about subscribers but on how the mobile telcos can continue to grow their revenues in view of competition from the OTT (over-the-top content) players and the shift of higher margin products like voice and SMS to data,” he adds.

The regional analyst agrees with Ong. “Given crippled subscriber growth, mobile telcos will intensify their search for new ideas to boost their ARPUs.”

The analyst is, however, pessimistic. Despite the numerous options to entice subscribers, their spending power and low disposal incomes pose a huge barrier to ARPU growth.

He cites the preference for lower broadband speed as a prime example. “It’s not that people are content with low broadband speed. Although prices may be deemed attractive, consumers just can’t afford paying them.”

On the recent reported data breach of 46 million subscribers, the Digi spokesperson says: “We prioritise the privacy of our customer data. The authorities are looking into the matter and we’ll continue to support them in facilitating the investigation.”

Digi suffered a setback on Nov 24 when it was removed from the Securities Commission’s list of shariah-compliant stocks, resulting in its share price falling 6% to RM4.41. Its removal was due to its conventional debt-to-total assets ratio exceeding the 33% threshold as of Dec 31, 2016.

The threshold was reportedly breached due to the drawdown of existing loan facilities to finance the 900MHz and 1800MHz spectrum fees amounting to RM600 mil, causing the debt-to-asset ratio to surge to 41%. Digi, in an immediate response to the removal, had said it was committed to manage its total conventional ratio within the 33% shariah threshold.  

Analysts highlight that a decision on Digi’s reinstatement on the shariah list will be made only in November next year at the earliest, as the April 2018 assessment will still be based on the 2016 audited accounts. Its share price has since recovered to RM4.76 on Dec 7.

Consolidating for growth

The revenues of mobile telecommunication companies (telcos) have largely been declining the past few years. For the latest quarter ended Sept 30, they fared no better as most reported poorer results.

The telcos generally set key performance indicators (KPIs) measured primarily by pre-determined revenue and net earnings growth rates. The latest poor results were reportedly the last straw for controlling shareholders of some telcos.

With shareholders’ patience running out and to fulfil the KPIs, a regional telecommunication analyst tells FocusM: “Realistically, the only way to boost revenue substantially is to acquire another mobile telco. I expect some of the bigger telcos to come to the negotiation table very soon with attractive offers.”

She says some of the bigger telcos may have been sounding out the smaller players. However, given the continuous decline in revenue, she says negotiations may be fast tracked. She can’t imagine the consequences if telcos continue to miss their KPI targets. “How much longer will the telcos be allowed by their controlling shareholders to continue recording lower and lower earnings?” she asks.

With a number of smaller telcos operating at a loss and possibly shutting down operations soon, one would assume that choices are aplenty for the bigger telcos.

However, that is not the case, says the analyst. “For acquisitions that lead to a substantial increase in revenue for the bigger telcos, the targeted company’s revenue base needs to be relatively large.”

She says the targeted company must account for a substantial portion of the enlarged revenue base on consolidation. The question is which telco can provide that revenue spike. For a bigger telco to consolidate the targeted telco’s revenue, a stake of over 50% needs to be acquired.

The analyst says medium-sized telcos will likely to be in high demand, but cautions: “Even if such a candidate is found, is the substantial stake for sale?” Even if there is, the asking price could be astronomical, she adds.

Aside from the big three telcos, namely, Digi.Com Bhd, Maxis Bhd and Celcom Axiata Bhd, medium-sized telcos in terms of subscriber base include XOX Bhd, U Mobile Sdn Bhd and Tune Talk Sdn Bhd.

Tune Talk and XOX’s annual revenues are between RM100 mil and RM300 mil. With the bigger telcos’ revenues hovering between RM7 bil and RM8 bil per annum, Tune Talk and XOX’s revenues will account for less than 5% of the bigger telcos’ revenues. Moreover, Tune Talk is already partly owned by Celcom.

The analyst says on paper, U Mobile appears to be the most attractive and only practical choice. “Its revenue of almost RM2 bil per annum is about 30% of the bigger mobile telcos’ revenue,” she says.

There were rumours of U Mobile’s major shareholders wanting to cash out, but the asking price would not be cheap now that the telco has its 900MHz and 1800MHz spectrums.

U Mobile’s revenue is about RM2 bil per annum

Straits Mobile Investments Pte Ltd, a unit of Singapore’s ST Telemedia, acquired a 33% stake in U Mobile in March 2010 for reportedly RM1 bil. Straits Mobile Investments is now U Mobile’s single largest shareholder with a 49% stake.

The analyst says: “Even if Straits Mobile is interested in selling its stake, what sort of price is the market looking at, taking into consideration that the ringgit has declined by over 25% (against the Singapore dollar) since 2010.”

If the acquisition was indeed for RM1 bil for the 33% stake, the analyst says: “The price would work out to S$13.17 mil per 1% stake (based on the exchange rate of RM2.30 per Singapore dollar at that time).”

At S$13.17 mil per 1% stake, the 49% stake in theory would cost S$645 mil. At today’s foreign exchange rate, the 49% stake in U Mobile would cost RM2 bil.

However, the analyst acknowledges the valuation is not that straight forward. “It would be a steal to pay RM2 bil for a 49% stake in a company that generates a revenue of almost RM2 bil per annum. If so, the purchaser will be able to recoup the cash within the first year of acquisition,” she says.

“The bigger telcos’ market capitalisation is in the region of RM40 bil. The size of U Mobile’s subscriber base is about half that of the bigger players. Apportioning accordingly based on market capitalisation, a 50% stake will be equivalent to RM10 bil,” she adds.

Bearing in mind the bidding for the 700MHz spectrum is about to start, the analyst expects any intention to consolidate may be expedited on two counts. If the targeted company manages to acquire the 700MHz, that will inflate the acquisition price further. Conversely, the targeted company may be holding the advantage and put things on hold until after the 700MHz has been allocated.

Analysts say securing the spectrum is imperative but the bidding will strain the bigger telcos’ financials, particularly their cash. The analyst dismisses any possibility of acquiring non-telecommunications-related companies for revenue growth.

On the possibility of Digi acquiring other telcos to boost revenue, a spokesperson says: “On merger and acquisition questions, we do not comment on speculation. If there is any such decision, we will apprise the market through a Bursa announcement.

“Our strategy is focused on delivering great internet services over our advanced data network, driving stronger contributions from our core business, capitalising on opportunities in digital services and applications, and developing new business models to tap digital lifestyle opportunities and IoT.

“While the market remains competitive, Digi will deliver on its ambitions by continuing to innovate across all areas, particularly by going digital and remaining laser sharp on running our business efficiently.”


Mobile subscriber numbers declining since Q4 2014

Albern Murty’s appointment as Digi.Com Bhd CEO in April 2015 came at a critical time when the mobile sector was going through its most trying period. It was entering a new era of fast-diminishing mobile subscriber base.

Changes were also seen at other major telcos. Maxis Bhd’s outgoing CEO Morten Lundal, who was appointed in October 2013, leaves on March 31 next year. Datuk Shazalli Ramly was appointed Celcom Axiata Bhd CEO in September 2005 before Michael Kuehner took over in September 2016. Shazalli was promoted to regional CEO for Axiata Group Bhd, before joining Telekom Malaysia Bhd as MD and group CEO on May 1, 2017.

Prior to his appointment as CEO, Albern, 44, was chief operating officer of Digi Telecommunications Sdn Bhd. Since joining the latter in 2002, he has held various roles in project planning and controls, product management and product development, head of strategy and new business, acting co-chief marketing officer and chief marketing officer. Before Digi, his previous experience includes business and commercial management roles in Lucent Technologies across the Asian region.

The 700MHz spectrum is open for bidding

Unlike the declining prepaid subscriber numbers since end 2014, the postpaid subscriber base continues to grow, from 8.1 million at end-2014 to 9.4 million as of Q1 2017. However, the growth was slower than the prepaid’s decline, resulting in lower overall subscribers.

A regional analyst tells FocusM: “There are also some shifts from prepaid to postpaid by existing subscribers which resulted in the latter’s growth.”

From 2014, Digi, Celcom and Maxis’ combined growth in postpaid subscribers was slower than other mobile telcos, resulting in the latter’s combined postpaid market share growing from 10% in 2014 to 16% as of Q1 2017. Of the three key players, Digi’s postpaid subscriber base grew the most, from 21% at end-2014 to 23% in Q1 2017.

The analyst says in reality, Digi’s prepaid subscriber base is declining despite its prepaid segment enlarging from 26% as of end-2014 to almost 29% as of March 31, 2017. “I foresee Albern and his team addressing this to maximise growth.”

On measures to address the declining prepaid subscriber base and the average revenue per user (ARPU), a Digi spokesperson says: “Our focus for prepaid is to continue stabilising the quality of subscribers in our base and drive internet revenue growth within this area.

“The decline in prepaid subscribers is an industry trend that can be attributed to SIM consolidation and prepaid subscribers converting to postpaid plans as the industry matures.”

He says Digi has experienced these prepaid to postpaid conversions within its subscribers due to its attractive and affordable postpaid internet offerings to its customers and the market.

Since 2014, Digi has lost 113,000 prepaid subscribers while Maxis’ base shrank 1.9 million and Celcom’s was down 2.9 million.

“As the market saturates, the bigger telcos are targeting postpaid subscribers as they (subscribers) provide more stable earnings unlike prepaid subscribers where possibility of a prepaid subscriber terminating is relatively higher,” says a regional analyst.

Trend-wise, Digi, Maxis and Celcom have been experiencing a decline in prepaid subscribers while the postpaid numbers have either declined marginally or increased.

The analyst explains bigger telcos’ preference for postpaid is also based on postpaid subscribers’ ARPU. Postpaid ARPU is about RM90 to RM100 per month compared with only about RM40 for prepaid.

Maxis has been enjoying rising ARPU for both its postpaid and prepaid markets, up from an average of RM96 to RM102, and RM34 to RM40 respectively in 2014 to 2016.

However, Celcom and Digi saw falling ARPUs in both markets. Digi’s postpaid ARPU was RM82 in FY14 before dropping marginally to RM81 in FY16, while its prepaid ARPU fell from RM41 to RM35.

Celcom’s postpaid ARPU stood at RM78 in FY16, RM9 lower than FY14’s RM87, and down substantially from RM94 in FY11 and FY12. For its prepaid market, ARPU held out well between RM35 and RM36 from FY11 until FY14, but fell to RM32 in FY15 and RM30 in FY16.

The regional analyst says a mere RM1 drop in ARPU can have a huge multiplying effect on a telco’s bottom line. “The multiplier effect is at play here. A RM1 difference (in ARPU) per month works out to a difference of RM120 mil in revenue per annum for a telco with 10 million subscribers,” she says, pointing out that smaller telcos don’t even make RM120 mil per annum.

To boost ARPU, the analyst says the telcos need to focus on service improvement and one way is to bid for the 700MHz spectrum.

In UOB Kayhian research report, analyst Chong Lee Len says the 700MHz is a prized spectrum, and expects many bidders such as Digi, Maxis, Celcom, U Mobile and YES Communications. The spectrum offers wider reach and better indoor penetration, further improving the telcos’ quality of service to their subscribers.

In a report, TA Securities analyst Paul Yap states that the risk remains a reduction in network quality gaps, with Digi and U Mobile being allocated a higher portion of the 900MHz spectrum and Celcom improving its network quality as a priority to recoup market share.

Alliance DBS Research analyst Toh Woo Kim highlights in a research note that data usage is still surging with the average data usage per subscriber growing 10-12% in Q3FY17.

This article first appeared in Focus Malaysia Issue 262.