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Choivo Capital

Author: Choivo Capital   |   Latest post: Sat, 6 Jul 2019, 5:16 PM

 

(CHOIVO CAPITAL) An analysis of TIME dotCom Berhad (“TIME”)

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An analysis of TIME dotCom Berhad (“TIME”)

 

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 Moat and Competitive Advantage
The main focus of my research for TIME is focused on its network as well as its retail consumer category.

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 Mbps

20 Mbps

30 Mbps

40 Mbps

50 Mbps

100 Mbps

300 Mbps

500 Mbps

TIME

 

 

 

 

 

RM149

RM189

RM299

TM

RM129

 

RM199

 

 

RM329

 

 

CELCOM

RM120

RM150

 

RM180

 

 

 

 

MAXIS

RM139

 

RM179

 

RM219

RM299

 

 

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.

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

1)      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.

2)      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.

Year

2010

2011

2012

2013

2014

2015

2016

2017

Revenue

321,083

313,872

419,088

548,258

596,283

682,364

766,940

860,696

Operating Earnings

36,115

70,187

73,301

118,032

143,861

170,649

199,102

175,362

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.

====================================================================

Facebook: Choivo Capital
Website: www.choivocapital.com
Email: choivocapital@gmail.com

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Labels: TIMECOM

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Chart Stock Name Last Change Volume 
TIMECOM 9.00 +0.06 (0.67%) 1,020,000 

  2 people like this.
 
VenfxPandora18 CHOIVO capital,

By reading your article, it is always a mind blogging.
The perspectives you have shared really btoaden my knowledge.
01/01/2018 11:50 AM
value88 Great in-depth analysis ! Tq.
01/01/2018 12:47 PM
Choivo Capital Haha, thank you. My returns however, should be far below yours this year. Still have alot to learn :)


VenfxPandora18 CHOIVO capital,

By reading your article, it is always a mind blogging.
The perspectives you have shared really btoaden my knowledge.
01/01/2018 11:50
02/01/2018 3:03 PM
No right Nor wrong Only to Win Maybe I'm just got luck in 2017...
Hope luck continue stick with me in Dog year18 :)
06/01/2018 12:07 PM
jibbie jon, is there a way to calculate the "corrected" ROE if the borrowings are high eg if i want to compare the ROE for TM and Time.
16/07/2018 3:54 PM
Choivo Capital Re-gear it.

Lets say TM

ROE:11.32%

Equity/(Equity + Net Debt) ratio:
= 7,435.8/(7,435.8+6,587.1)
= 0.53

Re-geared ROE: 6%


TIMECOM

ROE: 8.13%

Equity/(Equity + Net Debt) ratio:
= 2,278,327/(2,278,327-74,465)
= 1.03

Re-geared ROE: 8.4%
17/07/2018 6:01 PM
jibbie tq jon for the explanation. learn things when i read your blog. do keep writing. I hope to improve my stock picking skills by learning here
18/07/2018 6:01 PM
(HK1997 again) Philip I think one big question you need to ask is:


Is time cheap fibre selling cost versus tmnet fibre selling an issue of the legacy rates of tm wanting to earn more or is it some technology that only time has that allows it to sell at much lower prices?

If it is not, and a price war begins ( remember the old days of Digi versus maxis commercials),

but this time between fibre operators
Gigabroadband
Maxis fibre internet
Tm unifi
time fibre

And you add in 5g/6g incoming from cell operators (which no one ever saw coming 10 years ago)
Digi
Celcom
Maxis

Then you add in the alternative internet suppliers who are coming out with more offerings and better technology ( never expected 10 years ago either)
Measat

The race for cheap internet will become far more integrated, more low prices and commodities and the company with the lowest "internet" costs will succeed in the long term.

Who it is? No one knows. What I do know is South Korea charges 44000 won or rm159 for 1 gigabit (1000 MB) broadband speed access(via multiple methods). Who in Malaysia has the capex and the capability to undergo big investments like this in the future?

That is who I feel will be the winner in the future.
09/02/2019 8:24 AM
Alex™ Itu US telecom is the market leader. If leader huat, this will huat also.
09/02/2019 9:07 AM
godhand actually your table is quite outdated. its actually up to 1gbps which is 10 times faster than unifi catching up to global leader xfinity which sells their service up to 2gbps. Theres a fine line between moat and niche and i dont think timecom have a moat even with the advantages it have among its peers here. In few years time, i see that its not an issue for timecom to take away consumers from tm due to the obvious difference starting from the whole klang valley using timecom.
however this kind of business can it be replicated? fibre optic business i cannot be certain.

Although it is undisputed that timecom is uncontested for now. and i dont really like u use the word cheap and moat together.
09/02/2019 11:10 AM
Choivo Capital Thanks for the questions. I don't mind answering this one because it is not as wonderful an opportunity as my other buys, and I'm not topping up.

Phillip,

Yes. Because they have end to end fibre network. It's not a compeititon, everyone else either piggybacks TM network one way or another, or they buy wholesale from Time.

Better offerings? Well 5G maybe. But I wrote on that earlier. And even if people actually go crazy and put a 5g antenna at every building in kl to give that speed. You still need an underlying fibre network for those antennas and I think time can provide it. They just won a certification, MEF3.0. Which certifies that their packet loss and latency is low enough to support 5g. Only telco in msia to get that so far.

I don't think time will ever be the biggest broadband provider. But they can expand as much as they want. Net cash, no 99% dividend payout policy.

Pricewar? Time will eat the compeitition. Everyone but time piggybacks off tm. That's their cost base. And TM have so many legacy cost that cannot be easily removed.


Godhand,

I wrote this article sometime in early 2017. Didnt post it till end of 2017. The table is outdated, but I believe if you are to update it, time is still ahead. The rest of the article, I believe the essence is still relevant.

I think the fact tbey are pure fibre that is directly linked to global undersea cables. That is a moat. No other in msia is. And if you want to build this network, its extremely expensive, it takes time, and you have timecom there already, completely changing your economics.

Either way, my average cost is still from more than 1 year ago. 9.4. Business have far improved and price is far lower. The only reason I'm. Not topping up is, there is a business, not as wonderful, but far far cheaper.
09/02/2019 11:36 AM
factorrumour Timecom very smart, they focus on high rise residential area with fibre infrastructure readied, so they don't have to spend so much money on it, which let them have the pricing advantage due to lower costs, and then they use that to do marketing to show that they have faster internet speed and cheaper than others.

Only when dependency on mobility is higher than fixed lines, then people will start complaining on the expensive pricing from Digi, Maxis, Celcom and etc, if end up with government intervention the these telcos might be forced to lower their pricing and could as well attract more customers moving to use mobile data internet, however, given the restriction in the form of data quota, fixed line still has an advantage.

The best time to enter Timecom is during 2012 when they start advertising home fibre optic internet, now still a good chance to enter but obviously it's not an undervalue stock anymore.
09/02/2019 1:05 PM
Choivo Capital I have my doubts about 5G ever being able to replace fibre.

Having said that, I am aware of my limitations when it comes to technical knowledge, and that I am likely biased towards information that do not speak well of 5G.

Still,at this price, I like it. Those buying now, in lieu of the 15% drop from my cost as well as the 25% inprov d earnings from when I bought it.

Will likely be getting something like a 25-35% discount. When I bought it from was close to 27pe. Now its 18. Some are forex do note. Not that much, but still go study on your own.

Take what you may.
09/02/2019 1:28 PM


 

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