Telekom Malaysia - Trading halt involving P1?, 27 Mar 2014

TM- Trading halt involving P1?

TM’s and Green Packet’s (NOT RATED) shares were suspended today. Press reports allude to a possible acquisition of a stake in P1 by TM. Green Packet owns 57% of P1. P1 is a Wimax operator in Malaysia which is in the midst of migrating to LTE. It has 449K broadband subscribers, 1908 sites and more importantly, a 20MHz TDD block in the 2.6GHz spectrum band (core band for 4G in Malaysia) and 30MHz in the 2.3GHz band (currently utilised for its Wimax rollout).

P1 is a loss-making company - based on Green Packet’s broadband net losses of RM117mil - but is EBITDA positive (FY13: RM43mil) and generates EBITDA margin of 16%. The group’s broadband unit generates ARPUs of RM86 (as of 4Q13) versus TM’s Unifi ARPU of RM185 and Streamyx ARPU of RM85.

What we think could be the key rationale for the acquisition? Firstly, the combination of P1’s 2.6GHz spectrum, which is suitable for high capacity traffic, and TM’s 2x5 MHz block in the 850MHz spectrum (lower spectrum entails much better frequency distance, which lowers capex for coverage) is a strong combination which gives it an advantage over incumbent celcos, which only have access to 1.8GHz and 2.6GHz spectrums for 4G rollout. TM is in the midst of migrating its CDMA technology (a fixed wireless technology used for rural areas and areas where it is not cost efficient to reach via its fixed network) to 4G LTE.

Secondly, if TM intends to get into the 4G game in a big way, P1’s 449K subscribers will give it a meaningful base to start with. TM has circa 100K subscribers on its CDMA network currently. However, past calls with management suggests that the move into 4G LTE is mainly to complement its high speed fixed network which has limited coverage currently. Thirdly, TM may also have access to P1’s 1908 sites for the roll-out of its 4G network; the majority of P1’s sites would be in key cities vs. TM’s CDMA sites in rural areas.

Two key questions remain:- (1) Valuation of the deal rumoured at an implied value of RM2bil is quite excessive. Our estimates for spectrum value (RM290mil for 2.3GHz and 2.6GHz at an average assumption of RM0.20/MHz/population), site acquisition (RM416mil at an average of USD66K/site) and subscriber acquisition cost (RM225mil at an average of RM500mil/subs) come up to about RM930mil.  SK Telekom bought a 26% stake in P1 for USD100mil – implied value of RM1.3bil for the whole group; and (2) Whether a stake acquisition is the most efficient way to gain access to P1’s spectrum; Maxis-Redtone and Celcom-Altel collaborated to share spectrum without involving equity acquisitions.

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