KUALA LUMPUR, Nov 19 — The management of Time Dotcom expects results for 2014 to remain positive, but the network provider says it has many initiatives which may be capital intensive and could result in some margin compression for 2014 and 2015.

Still, it says the initiatives are necessary to ensure continued revenue growth in the future and it expects to benefit from them in the longer term.

It expects demand for higher speed bandwidth services and fibre connectivity requirements by mobile operators to continue throughout 2014.

These will provide additional data revenue streams.

Time Dotcom will also look into unlocking the potential of its data centre, submarine cable and global bandwidth businesses. It will do this by looking at organic growth and opportunities for further expansion both within and outside Malaysia, particularly within the ASEAN region.

It will also optimise customer acquisitions in its existing partnership with Astro, as well as in its own product offerings such as its own Fibre-to-the-Office and Fibre-to-the-Home products.

It said it has existing submarine cable investments that include a stake in Unity Cable System that connects Japan and the United States, and the Asia-Pacific Gateway (APG), that link Malaysia to Korea and Japan, which is expected to be completed next year.

It is also participating in the consortium to build AAE-1, a submarine cable system that will link Asia, Africa, Europe and the Middle East via Malaysia, and FASTER, another submarine cable system that would link Japan to the United States (targeted to be completed in 2016). It expects these initiatives to further enhance its global network footprint.

Time Dotcom is a fixed-line telecommunications network provider in Malaysia, a smaller rival to Telekom Malaysia. It owns a fibre network and charges telcos to use it.

The company just announced earnings for Q2FY14:

Revenue: +16per cent to RM 155.7 million

Profit: RM 44 million vs RM 390.3 million

One-off gains/losses: RM 0 million vs RM 349.4 million fair value gain on the realisation of available-for-sale reserve

Cash flow from operations: RM 94.1 million vs RM 57.4 million

Dividend: 0.0 sen per share vs dividend-in-specie of DiGi shares

Time Dotcom’s higher revenue came mainly from higher data revenue (higher global bandwidth sales) as well as higher data centre revenue.

Revenue from one-time non-recurring contracts in Q2FY14 was lower at RM3.3 million compared to RM4.3 million in Q2FY13. Voice revenue in Q2FY14 was RM1.6 million lower compared to Q2FY13 due to lower voice traffic.

The company reported a lower profit due to it recognising a fair value gain from available-for-sale reserves amounting to RM349.4 million in the same quarter a year ago.

But without the fair value gain, Time Dotcom said it would have posted an increase in pre-tax profits in Q2 2014 of RM2.3 million.

The increase in pre-tax profits in the current quarter is due to higher revenues recorded during the quarter, although they were offset by higher depreciation charges in Q2FY14 when compared to Q2FY13, lower dividend income received from its quoted equity investments and a net loss on foreign exchange of RM892,000 in Q2FY14 when compared to the net gain on foreign exchange of RM517,000 recorded in Q2FY13.

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1. How will investments in cables result in the amount of gearing?

With the expiry of tax incentives which lifted its FY13 results, Time Dotcom is also engaged in capital intensive initiatives by currently investing in these cables – Unity, APG and AAE-1. It announced its participation in the FASTER cable in August.

According to a report in May by Hong Leong Bank, Time Dotcom is selling APG capacity with Unity as they both have the same route and its bundle provides redundancy to the US. It expects revenue recognition by late FY14. The report also said Time Dotcom plans to do the same for AAE-1 next year prior to its completion in 2016.

In August, according to The Edge Malaysia, Time Dotcom has allocated RM270 million of capex for 2014. But that figure does not include its investment in the FASTER cable, which is estimated to cost US$56 million (about RM176.7 million) and will start contributing revenue in FY17.

Maybank said in a report in August that the incremental capex required for FASTER means Time Dotcom could turn into a marginal net-debt position in 2015 and 2016. The broker estimates a gearing of 2 per cent.

Time Dotcom is investing in these cables and although they will start contributing revenue in late FY14 the earliest, they require quite an amount of capital that even the company’s cash pile of RM238.6 million can’t cover.

How much gearing does it expect to take on? And from which sources?

2. Is it possible to time the sale of bandwidth to reduce lumpy revenue?

One aspect of Time Dotcom’s business is that it has lumpy data revenue, which results in volatile quarterly results. It derives income from its participation in submarine cables and then it sells bandwidth. An example of its lumpy revenue can be seen in the RM349.4 million it realised from available-for-sale reserve in Q2FY13, which was not recognised in its latest quarter (Q2FY14).

With its work on the four cables to start contributing revenue from FY14, is it possible for it to schedule regular sales of global bandwidth from the cables and reduce its lumpy results?

3. What is the current data centre utilisation rate?

Time Dotcom said in a Q1 analyst briefing back in May that there was still a data centre glut in Cyberjaya although it was not severely impacted as it is treated as a secondary site to Menara Aik Hua and only for price sensitive customers. However, its Cyberjaya data centre was 50 per cent filled with colocation priced at 10 per cent-20 per cent discount to Menara Aik Hua.

What is the utilisation rate of its data centre in Cyberjaya? Does it think it is still on track to achieving full utilisation by the end of 2014?

4. What is its progress in Vietnam, Indonesia data centre markets?

Time Dotcom said in the same analyst briefing that it had shortlisted Vietnam and Indonesia for potential entry to expand data centre business regionally. CEO Afza Abdul Rahman told The Edge in June that Time Dotcom has a “nice arrangement” with a data centre partner in Vietnam, and it also has a couple of things it is working on in Indochina as well.

But there has been little news of these initiatives since. What is its progress in these markets?

5. How will price erosion affect its wholesale segment?

According to Hong Leong Bank, the only drawback to Time Dotcom’s prospects is the “stubbornly high price erosion” ranging from 15 per cent to 20 per cent. This is not being offset by higher volume as competition from global service providers have heated up.

The cost of bandwidth is constantly going down, and as long as there is more work done on submarine cables and newer cables being commissioned, they will continue to go down.

Can the management of Time Dotcom shed light on price erosion affecting their business?

6. What will it do with its remaining DiGi shares?

Time Dotcom distributed 137.5 million DiGi shares as a dividend-in-specie last year, leaving it with another 137.5 million shares remaining.

Maybank said in a report in August that a distribution of the remaining Digi shares to shareholders is unlikely as Time Dotcom could turn marginally net-debt in 2015 and 2016.

Time Dotcom has received a dividend income of RM18.1 million from its DiGi shares this half year so far, up about 5 per cent from RM17.3 million the previous year. It received a total of RM31.8 million from its DiGi shares in FY13, down from RM83.3 million in FY12. The difference is due to it distributing half of its DiGI shares to its shareholders in the early half of FY13.

For Q2FY14, it sold off a small number of shares costing RM107,213 and realised a fair value gain of RM37,553 from the disposal.

Why is Time Dotcom selling off such small amounts of DiGi shares? Should it keep them for the passive income stream? Or is it planning to use the shares to get loans? What has Time Dotcom planned for its DiGi shares?

7. Local or SE Asian acquisitions in the horizon?

Time Dotcom’s competitor Telekom Malaysia is using recently acquired P1 as a platform to launch its wireless services to provide a full suite of communication services.

The last time Time Dotcom made acquisitions was in 2010, when it bought over two operating segments of its current business — the Global Transit companies which invests in submarine cables, and AIMS Group, which owns data centres.

Time Dotcom CEO Afzal Abdul Rahim has said before the company is not ruling out the possibility of it making acquisitions. Will Time Dotcom make an acquisition just like Telekom Malaysia? Or is it looking for acquisitions within Southeast Asia?

8. What if there is damage to submarine cables?

In September, the AAG (Asia America Gateway) cable suffered damage on the link between Hong Kong and Vietnam, according to Telecom Asia. This caused a slowdown in Internet speeds in Southeast Asia.

With Time Dotcom having stakes in several submarine cables, any damage to the cables could cause disruptions and as Maybank wrote in its initiation report on Time Dotcom, could in turn result in Time Dotcom being potentially liable for damages to its customers.

Will Time Dotcom be held liable for damages if one of its cables suffers damage?

We have invited the company (investor.relations@time.com.my) to an on-camera interview, and/or to reply to our questions in writing.

The company replied:

Thank you for your enquiries. Please be informed that we are currently in the midst of preparing for our financial results’ announcement. The earliest we are able to respond to you is after our announcement.

At the time of publication we have not received any further reply (which is why you are seeing this message).

We will update this report if we do.

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