Appraising TMI

The demerger of Telekom Malaysia was lauded by many, and most were optimistic of TMI's prospects. Many more were befuddled by TMI's disappointing performance following the demerger. Most research reports which came out were calling for TMI to be fairly valued at RM7.85, the reference price post demerger. Most pegged its fair value at RM6.50-RM7.00. Here are some factors to consider:

a) Optimism was high and saw huge volumes on the first couple of days of trading in TMI. Safe to say that there would be substantial contra positions taken up by traders and when institutions continued to sell, the contra closing out exacerbated the price weakness.

b) The RM7.85 was at the high end of the anticipated demerger price for TMi and that capped its attractiveness to institutions.

c) Attraction of TMI is that it owns stakes in telcos operating in 10 different countries. Celcom still contributed more than 50% to its 2007 earnings, meaning the international units are still at its infancy. Excelcomindo (Indonesia) and Dialog (Sri Lanka) were next contributing 10% each to TMI's 2007 earnings. The way to look at the holdings is that these three would underpin TMI's earnings going forward, the rest would be the kicker. It is very difficult to even start a regional telco operations. Though many of these international units are small, they can only grow bigger with the right management and capital expansion strategy. To me, TMI fits the bill as a pretty good stock with good earnings supported by substantial seed plantings in the region. TMI is not starting from a zero base - that has to account for something.

d) Bangladesh, Singapore, India and Thailand operations are flat for now. The Singapore operations should be sold at the right price as that segment is saturated and ultra competitive. However, it could be a very useful hub for inter-connection. The other 3 should be highly attractive assets in countries with very substantial population.

e) Iran and Pakistan are loss making, but how many even dare to venture into these countries. TMI being from a "neutral Islamic" country is parlaying its advantage by moving into these countries, a luxury many will not have.

f) Investors buying TMI now have to have to the mindset of a long term investor. You cannot and should not expect to flip it for RM9.00 in 6 months.

g) There are reasons to be highly optimistic of TMI's prospects two years down the road. Celcom (100%) is in the #2 in the country. Dialog (84.8%) is #1 in Sri Lanka. Mobile 1 (29.7%) is #3 in Singapore. Excelcomindo (67%) is #3 in Indonesia. Aktel (70%) is #3 in Bangladesh. TMIC (100%) is #3 in Cambodia. MTCE (49%) is #2 in Iran.

h) The company has a RM4bn loan from TM, and more debt is likely, and a possible share sale to boost its balance sheet. The sum of the parts valuation would range from RM7.00-RM8.50 and that's where it should find its feet.

i) We should not forget that TMI will only be an indexed stock in 3 weeks time, which will boost demand from indexed funds. I can see it moving back to RM8.00 when that happens.

j) TMI's new management could have done a lot better to communicate the actual strategy and capital expansion program immediately after the demerger instead of waiting for the market to buy and sell in the dark. Communications, people, communicate.

k) If you read into the basis for the demerger, it would be that TMI would need a lot of additional capital. What is left unsaid is more important. It should be the vehicle to invite foreign telco to take up significant stakes in TMI. It would have been politically risky and unacceptable to see BT or China Mobile taking up stakes in the old TM as you don't want "local significant infra assets" to be up for grabs in foreign hands.

Still, there are only so many genuine Asian regional telco plays, and TMI would appear to be a highly prized asset to the bigger global telco players. Do not rule out one or two giants accumulating strategic stakes in TMI in the coming months. The strategic stakes would be important to the giants for partnerships, inter-connectivity and gaining a foothold in emerging markets. Entry price important. Holding period should be mid to long term for full value.

p/s photo: Karen Mok