An analysis of TIME dotCom Berhad (“TIME”)

Publish date: Fri, 29 Dec 2017, 03:06 PM 

 

Brief Overview

Prior to 2008, TIME was a relatively mediocre telecommunications company, whose business was to lease telephone lines from TM and provide telecommunication service etc. Needless to say, it was not doing well.

In the later parts of 2008, the current CEO Afzal, who was aged 31 then, was hired to turn the company around. Afzal started his career at the car manufacturer Lotus before transitioning into tech and founding the Malaysian Internet Exchange (MyIX) in 2006.

His turnaround plan was turn TIME into a telecommunications company that connected Malaysia internally and externally with a pure fibre optic network.

A pure fibre optic network is, as its name describes, a telecommunications network or backbone made purely of fibre optic cables.

It is capable of speeds orders of magnitude faster than a copper network or a copper fibre hybrid network. But it is also more expensive to lay down.

TIME also have a very profitable data centre business, but that is not the core of what I think is most valuable about TIME.

TIME first started laying down the main backbone of the fibre network from Thailand/Penang to Johor/ Singapore in 2010, and since then, mainly provided their network services to enterprises and business such as Astro which require very high speeds and bandwidths.

On March 2016, they officially rolled out their fibre plan for Home and SME consumers (this is categorized as the “Retail” division in the annual report). And this is where I think the bulk of their future growth and earnings is going to come from.The main focus of my research for TIME is focused on its network as well as its retail consumer category.

 

 

 

The Moat and Competitive Advantage

 

The product

In terms of price and speed. TIME is able become, by far the best and cheapest provider due to its pure optical fibre network. Here’s a brief comparison between TIMECOM, TM, CELCOM and

 10 Mbps20 Mbps30 Mbps40 Mbps50 Mbps100 Mbps300 Mbps500 Mbps
TIME     RM149RM189RM299
TMRM129 RM199  RM329  
CELCOMRM120RM150 RM180    
MAXISRM139 RM179 RM219RM299  

What this shows, is that as of today, TIME have absolutely no competitors to the areas that they connect to. They are by far the best and cheapest option.

Most if not all of the customers with other providers will change their plans the moment they know TIMECOM is connected to their building. And because TIMECOM is the cheapest and the fastest, there is almost absolutely no reason for the customer to change from TIMECOM. Which brings us to the next point below.

 

The network

So, how is TIME able to provide the fastest internet connection for arguably the lowest price?

It’s simple, their network was built from the bottom up with optic fibres only, ensuring zero bottlenecks.

Compared to TM, whose network is made of a copper fibre mix, which was mainly due to legacy issues, as well as cost.

In addition, as a GLC, TM’s main goal is the breadth of coverage, paying less regard to profitability, which is why copper fibre mix cables is used as they are much cheaper.

The thing about these networks is that they’re effectively permanent due to the sheer cost of replacement and time required. If TM wants to compete in speed with TIME, they will need to essentially replace their entire copper fibre network which spans more than hundreds of thousands kilometres and was built over decades. Something which is simply not possible without great cost and a lot of time. It’s a little like having children, some things just take time. You cannot have a baby in one month by getting 9 women pregnant.

The thing about networks, is that they have a compounding effect. Similar to our brain neurons or veins, the larger the network, the more the points of extension. This was why TIME was only able to start offering connections to homes and SME’s in 2016, as the network simply wasn’t big enough yet.

Alternatively, TM can consider building a whole new pure fibre network, but this will necessitate pulling away resources from their current goal, and they are already in net debt of RM7 Billion. To top it off, TIME has a 7 year head start in this. In addition, it pulls them away from their main goal of complete coverage.

What about the wireless telco’s like Maxis, Celcom and Digi?  Well, in their case, this is not their core product, their core product lies in wireless telecommunications. And the majority of their earnings is distributed to the shareholders.F

In addition, every few years, they have to fork out billions buying spectrum rights. The home fibre service is more of an add-on where their network is usually leased from TM and sold as a package.

 

Recession proof and recurring income.

An internet connection is one of the truly recession proof items. Quite simply, it ranks alongside the electricity and water connection in terms of how essential it is. All contracts sold have a 24 month lock with breaking penalties

Even in the event of a recession, the absolute worst a customer would do, is to change to a cheaper plan, which incidentally also happens to be TIME’s. This ensures that their earnings is incredibly resilient.

 

 

Future Prospects.

 

Retail

In my opinion, the main growth driver for TIME moving forward is the Retail broadband segment. In the year 2016 when they launched, revenue in Retail grew by 70%. In 2017, it has grown by 105% according to investor relations.

For the current year, TIME is expected to hit more than RM800million in revenue, and as of Sept 2017, RM626 Million in revenue has be achieved with 15-20% of those consisting of Retail (according to their investor relations).

Given the compounding nature of the networks, the resilient earnings, as well as being the best and cheapest provider, growth rates for the future should continue growing at roughly 15-20% per annum, not including potential reductions/increase in one off IRU sales.

Currently, TIME is focused only on connecting condominiums or apartments, as these are by far the most lucrative demographic. Geographically, their main focus is mainly in Kuala Lumpur, Penang and Johor, where they have connected a total of roughly 1000 condominiums based on my own manual count.

We do not yet have the data on the total number of condominiums in Malaysia, but we it would not be excessive to estimate Malaysia to have more than 15,000 condominiums. Assuming they can connect 1000 condominiums a year (very optimistic), they would still have at least 15 years to go before they fully exploit this very lucrative market. And this is before they even enter the landed property market.

In addition, almost all new condo’s being built in Malaysia have their fibre backbones build by TIME. TIME does not own the backbone of these condominiums but they hold the first movers advantage.

In addition, if one were to check their Facebook page, one also see signs of a very fast growing retail segment. Currently, the general comments by the public consist of 2 types,

  • Why is my installation so slow? Why did my installer fail to show up, or why is the installation date 1 month from now. 

This is one of the signs of strong growth rates. Companies that are growing fast will quite simply find it hard to meet demand quickly. Timecom is definitely ramping up their number of installation contractors according to the investor relations.

  • When will TIME connect to my area?

This is by far the most common one, and shows the incredible demand people have for their product and the efficacy of their advertising.

This could very well be confirmation bias, but i don’t see such this comment in the pages of TM, MAXIS, DIGI, CELCOM or any of the other telco, whether landline of wireless. 

 

 

Overseas Expansion.

Currently, TIMECOM is also expanding overseas by taking a stake in Thailand’s Symphony Communication Public Co Ltd (SYMC) where they intend to do what they did in Malaysia.

They are also the partners in the “Asia-Africa-Europe 1” cable system, a 25,000 km cable system from South East Asia to Europe across Egypt, connecting Hong Kong, Vietnam, Cambodia, Malaysia, Singapore, Thailand, Myanmar, India, Pakistan, Oman, UAE, Qatar, Yemen, Djibouti, Saudi Arabia, Egypt, Greece, Italy, and France. The AAE-1 cable will have a capacity of more than 40 terabits to supply the broadband market across Asia, Africa and Europe. Construction is due to be completed in Q2, 2017. This will expand the possible markets of the company.

No further analysis done as it is too early and too abstract to make any meaningful analysis. But it definitely looks like a plus so far

 

 

Increased data usage.

If one were to look at internet usage in the US, more than 40% off all internet traffic is due to one company, Netflix.

In Malaysia, just by observation, even in the city areas, streaming is still not mainstream. Most people still download their movies or entertainment beforehand. And most of the videos being streamed is not even at 1080P resolution, much less 4k. As the data size for these videos increase exponentially with the resolution, It would not be unreasonable to think that Malaysians will soon follow the developed nations and start streaming most of their movies, and it is during this time, high speed internet will be most needed.

 

 

 

Business Risks.

Like Munger, I’m a firm believer of inverting. IE, if you want to know how to ensure the success of your business, find out how it will fail, and avoid that.

I’ve listed down the key business risk of TIME, and as long as they are avoiding these or taking mitigating steps, they should be fine.

Fast, Unlimited and Stable wireless internet at a great price.

The real risk to TIMECOM is that people may decide to only go with one internet connection and in this case wireless is better as it is more convenient.

The problem is that given the growth in usage of data, especially if Malaysians start streaming, wireless spectrums just can’t support that kind of usage unless 5G is used.

However, Malaysia have not even implemented 4.5G, and right now 5G is still a pipe dream even for the developed countries, where even the current standards of definitions of 5G is still under debate.

In addition, there is the technological aspect, 5G spectrums is generally very short range and requires a direct contact tower to tower with no obstructions from trees buildings etc. This would require an incredibly large amount of towers.

In addition, these towers still need to be connected to a fibre network. If 5G were to actually take off, it would require a much denser fibre optic network, and this, would be in more ways than one, very beneficial to TIME’s wholesale division.

 

Bad Service

Currently, they are complaints about customer service when it comes to installation etc, as well as occasional complaints about stability.

But these seem to be in line with a company that is experiencing strong growth. Thus far, they appear to be responding to the installation complaints very quickly.

 

 

Financials and Valuations.

Year20102011201220132014201520162017
Revenue321,083313,872419,088548,258596,283682,364766,940860,696
Operating Earnings36,11570,18773,301118,032143,861170,649199,102175,362

Financials wise, revenue have been growing at CAGR of 12.7% for the past 8 years. While earnings have grown at CAGR of 21.36%.

Operational profit have fallen this year higher depreciation of RM6.7 million mainly due to the completion of SKR1M and AAE-1 cable systems during the year, as well as the impact of depreciation from the Asia Pacific Gateway submarine cable system, which was not fully included in the results for 2016 as the cable system was only completed on 28 October 2016.

In addition, there was a higher net loss on foreign exchange of RM17.6 million in 9M 2017 compared to RM5.2 million in 9M 2016, and zero dividend income for the year compared to the previous year, as all their DIGI shares have been disposed. Naturally, more care must be taken to ensure these cost are truly one of or extraordinary, and not one-off/extraordinary cost that happen with regularity.

Balance sheet wise, the company is quite healthy with net cash of RM337 million.

With a market capitalization of RM5.274 billion, the company is trading at 31 P/OE (Price/Operating Earnings) and 30 EV/EBIT (Enterprise Value/Earnings Before Interest and Tax). This is not cheap by any metric.

Especially when compared to say, FAVCO, which is trading at EV/EBIT of 2.8 when using record low earnings. Or, PLENITUDE at EV/EBIT of 2.3, and have very valuable lands held at fair below market value. Or ORIENT, which has EV/EBIT of 4.3, but also have very valuable land held in Penang at 1974 valuations. Currently, the market cap of ORIENT is only 30% of RNAV, and you get a highly profitable Honda Dealership as well as Healthcare and Plantation businesses for free.

Or even PRLEXUS at 2.2 or LIIHEN at 6.1 (this is a furniture company whose sales grow at 20% per annum in USD terms).

It should be noted that companies with high EV/EBIT tend to be companies that are inefficient at capital allocation, often preferring to hold massive amounts of cash. It improves the health of the company but reduces returns. Such as PLENITUDE or FAVCO.

By every quantitative metric, margin of safety is low to non-existent. This becomes especially clear, if we were to take the Bruce Greenwald perspective. I.e., when buying a good business, one would be paying for the good business and good management twice.

The first time, as the original outperformance is incorporated into the earnings which is extrapolated, and the second time when a higher multiple is given.

However, given that this company, as Li Lu would say, is doing business the true ethical way, and is a plus for humanity, by virtue of being the best and cheapest provider of essential services, as well as its incredible moat. I would say that at 30 EV/EBIT. It is not overvalued, but at fair value.

In more ways than one, at current valuations, one is already paying for the incredible growth rate of the “Retail” segment. However, I think the resilience of the earnings, provide some level of safety.

Personally, I think some things is worth paying for. I hold about 20% of my portfolio in this and it is one of my largest positions. Due to the price, there will be no topping up or maintenance of portfolio size unless a major drop in price, change in fundamentals (outperformance or underperformance) occurs.

 

 

Update, 2 March 2018:

Well, for the most part the company performed as expected.

When the new government was elected in, the new Minister of Communications and Multimedia, Gorbind Singh implemented the Pakatan Harapan policy of,

“Double the speed at half the price” 

Well, TIMECOM was so far ahead, that they could actually choose to not do anything, but they adjusted the plans. The current comparison of plans is as follows.

time pricing

As you can see, its not even close, and while companies like AXIATA and TM, were posting billion dollar impairments, and drop in revenue and profit due to the new policy. TIMECOM posted their highest ever operating profit.

Time profit.PNG

That’s what you call a moat! From 2010 to 2018, Revenue and Profit Before Tax grew at CAGR of 15.02% and 29.67%.

Despite this, the stock price is currently below its price when this article first written. Valuation wise, its currently 16 times earnings. A company growing earnings and revenue at 16-18% and selling at that price, translates to about 11%-12% yield. FD’s currently yield 4.6%. And to top it off, this company can really scale up with the profits they earn at good rates of return. ROE is 11%.

I’m personally glad to be given the chance to buy a far more valuable company at the same price. 

 

In terms of risk, 5G appears ever closer to fruition. Here is a brief overview.

5G is the 5th generation wireless connection that runs on low frequencies and high frequency bands and is expected to be up to 100 times faster than current 4G speeds.

Now, despite how optimistic people are about the wonders of 5G, we need to note this.

4G is not even properly implemented worldwide, not in even in the US or Malaysia. Do you see the LTE sign on your phone, that stands for “Long Term Evolution”, or basically as how BN ministers use to say ”Akan cuba lah”. LTE is what you put when its not yet full 4G. You notice how they even say “Long Term”, this means few years also can mah!

Now let’s say they roll out 5G, the thing you need to know is this, it will take a long time for nationwide rollout. Because the key weakness of 5G, is that if you want to get those extremely high speeds, you need MIMO devices every 50-100m, or basically everywhere.

Those articles you read about where 5G had speed of 10-30GB per second, it’s the 5G device directly facing the MIMO device 50 meters away on the highest milimetre frequency bands. If someone walk in between, putus straight!

If they want better range, they need to use the low to mid frequency bands. SPRINT, a US company is aiming to release 5G in parts of the nation, the minimum speed they are aiming for is 2-4mb, even our “akan cuba” 4G is faster.

And lets not forget, even with just 4G LTE, its not uncommon for our phones to drop back to 3G bands.

Realistically, using the mid bands, 5G will be able to provide 100MB download speeds once its fully implemented, based on real world testing in Frankfurt. Depending on area, it may be feasible to use high, mid and low bands, which will give different speeds.

Nor is there any updates if there will still be data caps. No much point for fast downloads, if you’re capped to 5GB per month.

Now, even if they do take off in a big way, TIMECOM stands to benefit in a big way. These MIMO devices need to be connected by a fibre optic backbone, and TIMECOM is well positioned for it. And if people start using 5G for their connections, it would save TIMECOM cost when it comes to connecting to suburban areas.

When it comes to suburban areas, the reason TIMECOM does not connect to them is firstly cost, its just more profitable to connect to condo’s and secondly, because they can’t.

TM previously did not allow the use of their poles, and government does not allow above air fibre optic cables as they look ugly. And so, if TIME wanted to connect, they need to dig new tunnels to all the houses.

But if 5G took off, they can very easily just install a few MIMO devices, connected to their fibre network, near suburban areas and use the mid-spectrum bands to offer high internet speeds to homeowners.

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