Spectrum shock wave


Shares of major telcos tumble after auction announcement

THE announcement on the auctioning of spectrum has wiped out a massive RM15.7bil from the market capitalisation of the four major listed telecommunication companies in a matter of two days.

Clearly, investors in these companies, Axiata Bhd, DiGi.Com Bhd , Maxis Bhd and Telekom Malaysia Bhd have perceived that the Government’s decision to use the auctioning of telecommunication spectrum does not bode well for these companies.

There is fear that dividend payments by these companies, which have been handsome, may also be compromised since the cost of auctioning can get exorbitant.

Spectrum is a rare commodity and globally, it is sold at high prices. That has not been the case in Malaysia where it has, in the past, been assigned to players at paltry sums of RM50mil each for the bigger blocks.

Some have got the spectrum and not used them. Others have sold them like the case of Time dotCom selling the 3G spectrum for a whopping RM654mil to DiGi in 2007/8.

But now, the Government needs the money for its coffers and is going to go for spectrum auctioning since it is a trend globally.

Just last year, the Thai government earned US$6.5bil in auctioning 20Mhz of the 900Mhz spectrum.

The biggest ever gain made by any government over the sale of air was the British government in 2000 when it sold 3G spectrum for a whopping £2.5bil.

India is hoping to make billions of dollars mid this year when it auctions several blocks of spectrum.

Up for grabs here would be the prized 900Mhz spectrum which can help data mobility and data is the way to go. Also on auction eventually will be the sub-1GHz spectrum and in the far horizon the 5G spectrum.

AllianceDBS Research says spectrums in sub-1GHz should be made available for mobile broadband.

“The 900MHz should be re-farmed to ensure equitable distribution and be made technology neutral, but the 1800 MHz will not be auctioned for now,’’ the house says.

Currently, the 900Mhz spectrum is now sparingly occupied by Maxis, Celcom and DiGi with 32MHz, 34MHz and 4MHz respectively.

For years DiGi has been crying out to get more of this spectrum but to no avail however, with auctioning, and if it is willing to pay the price to participate in the bidding, it may get more.

Kenanga Research says that the price of the spectrums varies from country to country or even on a case by case basis as it will depend on the usage of the spectrum lot, bidders’ financial capability under the spectrum auction scheme as well as the reserve price.

All the pricing in the region may be used as a guide by the local industry regulator to determine the price for the auction.

CIMB Research says that in the recent Thai auctions, the reserve price for the 900MHz spectrum was THB12.9bil for 2 x 10MHz, or RM2.2mil/MHz per million population. For 1800MHz, the reserve price was THB15.9bil for 2 x 15MHz, or RM1.8mil/MHz per million population.

It added that if the regulator of the industry uses the same reserve price benchmark, the minimum Maxis, Celcom and DiGi would have to pay to retain their 900MHz and 1800MHz spectrum are RM2.37bil, RM2.43bil and RM1.46bil, respectively.

However, it adds that the final spectrum price will depend on the auction terms and the bidding intensity.

“In the recent Thai auctions, the final prices were 2.5x (1800MHz) to nearly 6x (900MHz) higher than the reserve price due to intense bidding. If we assume the same outcome, Maxis Bhd, Celcom and DiGi would have to pay RM9.55bil, RM9.94bil and RM4.11bil, respectively, to retain their existing spectrum holdings,’’ CIMB adds.

AllianceDBS Research cites Singapore’s case where the auction reserve price for the 900MHz bands is currently set at SG$20mil for a 2x5MHz block.

“Adjusted for forex and population size, this means auction reserve price for the whole 60 MHz of 900 MHz band spectrum in Malaysia could start at RM1.9bil. Assuming winning bids end at 100% above theoretical reserve price and 15-year license, this would mean a winner will spend on average RM1.27bil for 2x10 MHz spectrum, translating to yearly amortisation charges of RM85mil. This equals to about 2-3% impact on earnings, which is manageable in our view,’’ it says.

Rising costs

All this simply means that overall cost for celcos will escalate several folds.

They are currently investing anything from RM700mil to RM1bil a year in capital expenditure to grow their market and expand their networks.

Data is growing at a very fast pace and indoor connectivity is much needed. Of course, wireless options are available but all these celcos have to invest more for indoor coverage and the spectrums like 900Mhz helps greatly in that.

PublicInvest Research says that all this will lead to higher borrowing and hence, reduce the telcos’ ability to maintain its current dividend payment. Although the government has yet to unveil the details, but Kenanga Research is talking about a possible de-rating of the sector in view of the hefty funds needed by the telcos.

CIMB believes that Maxis and Celcom stand to lose the most given the potential cash outlay for their larger spectrum holdings. They may also lose some 900MHz spectrum that could see a degradation in their network coverage. While DiGi could get more 900MHz spectrum, it may have to fork out a lot of cash to win some in the auction.

Most research houses felt TM remains a top pick in this new scenario.

If it is going to get tough for celcos and the fear is that they are likely to pass the higher cost to consumers. But it is not going to bode down well with consumers who are already being burdened with high cost of living and that is why the industry regulator has to balance things up so that the consumers will not be caught with the wrong end of the stick.

Incidentally, it was also on Thursday that Celcom and Telekom entered into a collaboration that paves the way for TM to enter the mobile market. It was a player in the mobile market once upon a time but gave Celcom up when the government decided to create a sole mobile unit that spreads its wings outside Malaysia. That was how Axiata Bhd was created and Celcom is a unit of Axiata now.

TM bought into Packet One last year to supplement mobility solutions with its fixed high speed broadband offering. With its recent deal with Celcom, it now has a domestic roaming partner in Celcom.

PublicInvest does not expect the mobile venture to generate positive returns, not at least another 3-5 years.

Analysts also do not think TM will be a serious cellular player though a beneficiary in an industry that will get tougher where margin squeeze and lower dividend payouts will be inevitable. This is despite the fact that the telcos are earning on one of the highest Ebitda margins of 45-50% versus its regional peers of 30%-40%.