How will the spectrum fees impact the telcos and us?

ON the eve of Merdeka Day, the Malaysian Communication and Multimedia Commission announced that it will be charging mobile operators fees for the 900MHz and 1800MHz spectrum it is allocating. The spectrum will only be allocated to the telcos effective July 2017.

 
The fees comprise of both lump sum fee, which ranges from US$122.3 million (RM500 million) to just under US$199.8 million (RM817 million), and annual fees of between RM50 million-RM70 million over a 15 year period.
 
(RM1: US$0.25)
 
Under the new fees structure, Maxis and Celcom (which were allocated 2 x 10MHz in the 900MHz band, and 2 x 20MHz in the 1800MHz band) will each pay a lump sum fee of RM816.7 million, and RM70 million of yearly fees for 15 years.
 
Digi's one off payment would be about RM598 million, while annual fees is at RM51 million, while U Mobile's lump sum fee is RM503.4 million with annual fee at RM43.3 million. 
 
Industry reaction and expectation
 
Under this new structure, the government stands to gain over RM6 billion over the next 15 years from the two spectrum bands.
 
While this amount may seem large, it is still within industry’s expectation and is perceived as a reasonable decision.
 
To recap, the market did not react well and started to dump telco stocks when the government first announced its intention to reallocate the spectrum via an auction. Collectively, the big three mobile operators plunged by 7% or over RM9.4 billion on January 28.
 
The lump sum payment was also significantly lower than what market expects. Analyst were expecting the one lump sum payment to be around RM1 billion to RM1.15 billion per company.
 
“As such, the actual upfront fee of between RM600 million and RM817 million is viewed positively.
 
“More importantly, this will help to eliminate an overhang on the industry since February 2016, when the spectrum reallocation and an imposition of upfront fee was first announced to the public,” said UOB KayHian analyst Chong Lee Len in a research report.
 
How will this impact U Mobile?
 
There is no doubt that U Mobile has been keeping the incumbents on their toes over the recent years, with their offers of among the most attractive packages in town.
 
For a company that is still operating at a loss, will U Mobile be able to cope with the lump sum fees being imposed? 
 
A look at the company's 2015 financial statement showed that the company has a paid up share capital of over RM2.08 billion. 
 
However, as the company's accumulated losses may be more than RM2.2 billion, and with a current assets (where its cash and bank balances are parked) of RM398 million, it may mean that U Mobile may need fresh funds to finance its future capital expenditure (capex) and the lump sum fees.
 
Also, its bottom-line did not show signs of improvement. For the financial year ended December 31, 2015, its net loss widened to RM367.7 million, from a net loss of RM191.8 million a year ago. 
 
The good news is that its revenue rose to RM1.43 billion in 2015, from RM1.26 billion in 2014.
 
(Disclaimer: The assumption above is based on its 2015 numbers. U Mobile, which is a privately-owned entity, may have raised the necessary funds in 2016 to drive its business forward. The assumption of RM2.2 billion accumulated losses is based on the company's 2015 reserves of -RM2.29 billion.)
 
Currently, U Mobile is 49% owned by Straits Mobile Investment Pte Ltd - a unit of Singapore's ST Telemedia (which also has a stake in Starhub). 
 
Its second largest shareholder is U Telemedia Sdn Bhd, with Malaysian tycoon Vincent Tan as the single-largest shareholder, with about 37%, followed by Johor's Sultan Ibrahim Ismail Ibni Almarhum Sultan Iskandar Al-Haj with 15% and Magnum Bhd with about 6%. Tan also has a 6% direct stake in the company.
 
According to an industry source, U Mobile may need to raise well over RM1 billion in the near-term as it not only needs to fulfill its spectrum fee commitment, but also to finance its capex and pay vendors.
 
To recap, the company announced last October that it was planning a capex of RM3.5 billion to RM4 billion over a five-year period -- which is equivalent to an average of between RM700 million to RM800 million a year. That was before the government announced the reallocation of the spectrum, and the fees structure.
 
With the reallocation of spectrum, the company is currently looking at accelerating its network expansion plan this year. 
 
How will it impact the big three?
 
For the big three, analysts are expecting the spectrum fees structure to have a minimal negative impact to their earnings. 
 
Chong expects the telcos' net profit to be lower by 1-3% in 2018 - the maiden year the telcos experience the full impact of the spectrum fee structure.
 
In terms of capex, Chong expects Maxis and Celcom to spend additional RM1 billion to RM2 billion in annual capex  over a 10-year period to provide seamless network experience to their existing customers. 
 
"This is due to the step-down in spectrum holdings effective July 1, 2017," said Chong in a research report. 
 
In order to understand the relation between the higher capex and step-down in spectrum holdings, one can imagine telco's spectrum as highways. In the past, Maxis and Celcom are offering services to their millions of customers on a 50 lane highway. 
 
However, post July 1, 2017, they will need to offer the same service with lesser lanes. So, in other words, the telcos will need to invest so that the quality of service will not be affected with "lesser lanes".
 
While the big boys will not likely have issues in paying the lump sum fees, it could affect the company's gearing. 
 
"We estimate that the one-off lump sum payment would raise net gearing levels but may not necessarily lead to lower dividend payout this year, as debt levels should remain manageable.
 
"Maxis 2016 (forecast) net debt/ Ebitda will rise from 1.7 times (x) to 1.9x, Axiata's from 1x to 1.1x, while Digi's from 0.3x to 0.5x," said AmResearch analyst Alex Goh in a report.
 
While the spectrum fee structure will also result in lower margins for the telcos, it should not be an alarming issue, as the margins Malaysian telcos are enjoying are amongst the highest in the world.
 
How will it impact consumers?
 
Consumers will stand to gain with the spectrum allocation, as the move gives all the four telcos an even level playing field to compete on. 
 
The telcos can no longer blame the lack-of-spectrum as the reason for providing below-expectation network quality. 
 
With competition becoming intense, it is somewhat safe to believe that the telcos' will not be passing down the cost to the consumers and any cost-passing exercise by any party will likely be a recipe for disaster. 
 
In fact, the regulator has assured that the allocation will result in even lower prices moving forward.
 
MCMC chairman Halim Shafie said that to ensure costs are not passed down to subscribers, it is a condition of the allocation that the players shall offer packages that are cheaper than the current prices to their subscribers.
 
Related Stories:

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Axiata adamant that Celcom won’t be affected by smaller spectrum allocation
 
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