Simplified diagram of TM’s submarine cable network (Source: TM)
KUCHING: The low regional broadband penetration rates in the Asean region represents opportunities for telco players such as Telekom Malaysia Bhd (TM) and Time dotCom Bhd (TDC) to tap into growing demand for international bandwidth as broadband penetration rises.
The telco players shared similar views on this, in particular on the Indo-China countries (Cambodia, Laos, and Vietnam) which have very low broadband penetration rates.
According to Lim Tee Yang of RHB Research Institute Sdn Bhd (RHB Research), Indo-China countries have experienced very strong demand for international bandwidth, growing by at least 60 per cent on a compound annual growth rate (CAGR) basis from 2007 to 2011.
Going forward, forecasts from International Monetary Fund (IMF) and telecommunications market research and consulting firm TeleGeography indicated that Vietnam and Thailand expected to achieve a 40 per cent CAGR from 2012 to 2018.
Besides that, real GDP growth for each country has also been high (at least five per cent annually) since 2010.
“We think that TDC is well positioned to tap into growing demand for international bandwidth from the Indo-China countries, in particular when the Asia Pacific Gateway (APG) cable is completed by end-2014,” Lim opined.
So far, a substantial portion of international bandwidth sales on Unity cable – a Trans-Pacific submarine communications cable between Japan and the US – are attributable to Thai customers.
The APG cable gives TDC direct access from Malaysia to Japan instead of using Singapore (and paying more in the process) as a conduit. TDC will still continue to use Singapore as a conduit but will nonetheless save some costs by reducing dependence when the APG cable is ready.
To recap, via a consortium of which TDC is a member, the APG is a 10,000km submarine cable system whereby the trunk network connects Malaysia directly to Korea and Japan with branch networks into China, Hong Kong, Singapore, Taiwan and Vietnam.
Currently, TDC carries transborder data traffic from Thailand through its domestic network and then subsequently to its Unity Cable via Singapore.
TDC is forking out US$45 million (RM135 million) as well as the Malaysian cable landing station for its portion of initial capacity amounting to 3.4Tbps (Tera bytes) per second) out of APG’s total design capacity of 54.8Tbps.
The investment in the APG will be funded by internally generated funds and borrowings.
TDC’s current gearing level is relatively low given its estimated financial year 2013 (FY13) net debt/earnings before interest, taxes, depreciation, and amortization (EBITDA) position of only 0.75-fold, which is lower than domestic sector average of 1.0-fold.
As for TM, it has an extensive network of submarine cables in Asia Pacific through its participation of various consortiums.
“However, we note that TM utilises most of its international bandwidth capacity for internal use and also to swap with other telcos either for redundancy purposes or for connectivity that it may not have.
“TDC, on the other hand, only uses five per cent of its international bandwidth capacity for internal consumption and sells the remaining bulk in the secondary market,” Lim explained.
As such, TDC is preferred as a direct play to strong demand for international bandwidth, especially as the management is now exploring M&A regionally and has identified Thailand, Indonesia and the Philippines as countries with potential.
Overall, RHB Research expects international bandwidth prices to continue trending downwards by an average of 20 per cent annually which is more than offset by the surge in international bandwidth demand, projected to grow at a faster rate of around 40 per cent.
However, the research house maintained an ‘underweight’ rating on the telecom sector due to heightening risk as valuations become increasingly stretched at this juncture.
While the telecom sector generally still offers above-average dividend yields relative to other sectors, valuations may potentially face downward pressure should bond yields continue to expand.
Higher bond yields would translate into a higher risk-free rate, against which its discounted cash flow (DCF) valuations are benchmarked, thus leading to lower valuations.
“Despite this, we believe the sector’s fundamentals are still sound. Valuations for the stocks under our coverage are quite stretched, hovering at one to two standard deviations (SD) above their three-year average forward price-earnings (P/Es).
“This implies some vulnerability but we think there is still some degree of defensiveness left as telecom stocks usually have well-articulated dividend policies and are index-linked, in addition to unexciting but steady earnings growth,” Lim added.