Regulation Change Did Not Impact Telekom Malaysia’s Overall 2018 Business Performance, but Pushed TM to Accelerate Its Transformation

A. Amir

Summary Bullets:

  • Telekom Malaysia (TM) survived a challenging 2018 with stable business performance despite a huge decline in net profit.
  • TM is expected to bounce back in 2019 with growth in enterprise, driven by PIP 2019 and a vertical focus.

2018 was a challenging year for telcos in Malaysia. The Mandatory Standard on Access Pricing (MSAP), set by the new government, has pushed down connectivity prices in the country. As the domestic fixed-line market leader with a connection share of 66% (source: GlobalData Malaysia Telecom Forecast Q4 2018), Telekom Malaysia was heavily impacted by this new regulation. The provider had to reduce its connectivity service price by around 40% whilst offering up to 10 times the speed for some of its packages in order to meet the new regulation. As a result, credit rating agencies such as Fitch revised the company’s outlook from ‘stable’ to ‘negative’ and the S&P changed TM’s profile from ‘intermediate’ to ‘modest’ last year. Its share price went down by 57.0%, from RM6.18 (at the beginning of 2018) to only RM2.66 at the end of the year. (It has gone back up since November and closed at RM3.18 on March 8, 2019.)

However, TM survived the challenging year, remarkably with only low single-digit declines in its top-line business performance as reported in its FY 2018 financial results. (For more, please see Telekom Malaysia Survived a Challenging 2018 with Stable Business Performance from March 4, 2019). While many forecasted a double-digit decline in TM’s 2018 revenue, TM recorded declines of only 2.2% and 3.0% for its revenue and EBITDA, respectively. This trend is not uncommon for telcos, especially when playing in a mature market with intense competition as the usage of traditional telecom services drops. In Malaysia, Maxis’ revenue for the same year declined by 2.4%. Incumbents in other countries are facing similar trend, too; for example, Telstra maintained its FY 2018 revenue at 0% whilst Singtel saw 1.5% declines in its FY 2016 and FY 2017 revenue before a 4.9% growth in FY 2018. Like other telcos, TM suffered declines in voice (-5.3%) and enterprise data (-8.7%), offsetting the growth (3.7%) of its Internet services. TM also reported an 83.5% YoY decline in its net profit due to a one-off significant impairment, which has made the headlines in various news and industry reports. While net profit is certainly a significant parameter in assessing a company from a credit analysis perspective, many overlooked the stable business performance for TM in retaining its subscribers and hence leadership in the market, as shown by the revenue and EBITDA.

Whilst many talked about the negative impact of the MSAP, the change in regulation has also pushed the provider to transform internally and externally. As part of the transformation, TM developed Performance Improvement Program (PIP) 2018, which showed positive results by helping TM not only to increase its operational efficiency, but also to become more proactive in grabbing the market opportunity in order to drive its revenue. In enterprise (TM ONE), 2018 revenue declined by 3.0% due to lower voice usage, but it is expected to bounce back this year, driven by PIP 2019. TM ONE is also strengthening its focus in vertical play. The initiative is in line with the market trend and therefore is expected to help drive the provider’s enterprise and overall revenue.

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