Quick Ratio (QR)
The QR also saw a similar increase in percentage in 2000 from 1999, i.e. from 0.88 to 1.23. The possible reasons could be attributed to the significant increment in trade and other receivables as well as significant improvement in cash flows of the group.
(III) Use of Asset
Fixed Asset Turnover (FAT)
The FAT saw a slight improvement of 0.41 times in 1999 to 0.47 times in 2000. The slight improvement could be attributed to the higher depreciation charges for the fixed assets as well as the losses being written-off for the impairment of fixed assets. These have led to the declination in the value of fixed assets and therefore increase the FAT.
Debtors Collection (DC)
The group has saw its debtor’s collection period increased from 91 days to the 120 days. One of the possible reasons could be due to the better performance in operating income, this has probably led to the trade receivables to increase simultaneously. Therefore, this could lead to the possibility of the period of collection of receivables from its customers to increase as well.
However, TM has to compare its policy against the industry to determine whether its collection period is within the industry norm.
(IV) Capital Structure
Gearing
The gearing ratio for TM saw a slight decline in 2000 from 1999, i.e. 39.76% to 38.59%. Although there is an increase in the level of borrowings, however, this particular increase has been offset by the issuance of ordinary shares under the Employees Shares Option Scheme (ESOS). Therefore, this has led to the slight decline of the gearing ratio.
In other words, this shows that TM is able to rely more on the shareholders funds to finance its operating activities instead of relying more on external borrowings to finance the activities.
Interest Cover (IC)
The IC saw a significant improvement from 2.64 times in 1999 to 3.94 times in 2000. The possible reasons could due to the improvement in the group’s operating income as well as in the other operating income, i.e. the profit on disposal of an associate company. Therefore, this led to a better coverage for its finance cost obligations.
(3) CURRENT MARKET OUTLOOK
The year 2000 can be considered to be a positive year for TM considering its achievements in its demands for its telecommunications services as well as consumer satisfaction. However, the Group also experienced some negative results in terms of contributions from overseas. We’ll look at these events in details.
(I) Rapid Increment Of Demand For Mobile and Multimedia Services
The impressive performance from the mobile and multimedia services is due to TM’s continuous efforts and focus in the past two years to create and pro-actively manage the expected rapid consumer migration from fixed line to mobile and multimedia services.
In the year 2000, the total customer growth that have been seen in the year have surpasses all of the previous records. Its mobile customers grew 953,000 or 118%, this is equivalent to a 20% market share in the mobile service industry. Meanwhile, TMNet subscribers grew to 856,000, an increment of 114%.
(II) Better Performance From Fixed Line Services
The year 2000 has also seen a better performance from its core fixed line services. This segment of services has registered a growth of 4.6%, which has increased it customer base for the fixed line services grew to 4.6 million. This is a slight increment of 3.0% compared against 1999, which grew by 1.06%.
Nonetheless, this increment will continue to ensure that profits from the core
fixed line business to be a stable income stream.
(III) Poorer Contributions From Overseas Ventures
The World Economy seemed to have peaked in 2000 and USA in particular is bracing itself for a softer landing. Undoubtedly, this will have some impact on the Malaysian economy.
The slowdown has also affected the contributions from its overseas ventures. The profit contribution was lower from the previous year due to slower economic growth and currency depreciation in Africa.
Nevertheless, TM sees this only as a short-term setback and reiterate their long-term commitment to their international strategy.
(IV) Consumer Satisfaction and Service Quality
In the year 2000, a survey conducted by MBS showed that the Cutomer Satisfaction Index (CSI) for TM’s services increased by 11% from 1999 to 83% in 2000. Despite an increase in the number of customers the number of customer complaints dropped by 30% from 2,980 recorded in 1999 to 2,098 in 2000.
(4) NON-FINANCIAL ANALYSIS
(I) Customer Perspective
- Customer Relationship Management (CRM)
The customers’ perception of TM will always be formed primarily on the basis of the quality of service and the manner it is provided the front liners, i.e. the Telephonist Customer Service. Therefore, this has led to the setting up of Customer Assistance Service (CAS) Division. CAS operates the Customer Services Call Centre and the conventional operator-assisted services.
Since its inception, CAS has been able to operate dynamically, striking a balance between providing quality service without compromising its bottom line.
- Discounts and Value Added Services
Besides focusing on the 18-25 age group for which TM launched the
TMTOUCH prepaid service, it has also lined up several attractive packages for
Market segment. These include the Topaz, Intan, Silver, Platinum, Gold,
TMTOUCH Business Partner and special Government Package, which offer
users discounts on access fees and value added services.
Also, TM Multimedia (TMM) developed a gift reward programme with
Maybank and RealReward Programme in appreciation of TMNet users where
they can collect points for redemption of a wide range of gifts.
Other programmes which are introduced in the year 2000 is the Streamyx
and BlueHyppo programmes which is to cater the needs for the business as well
as a one stop lifestyle portal respectively.
- Partnerships with MNCs For Better Internet Services
TMM forged smart relationships with Microsoft and Hewlett Packard
to enhance its Netmyne service offerings, particularly in the area of application
hosting so that customers can have instantaneous access to online services.
(II) Learning and Innovation Perspective
- Setting Up of Multimedia University (MMU)
MMU is set up in July 1996 in which it became the first private university
in Malaysia. The main aim of MMU is to provide highly skilled workforce in
order to serve the MSC and the global community in the information and
knowledge millennium.
To date, the University has submitted 5 patent filings concerning the areas
telecommunications and multimedia learning and numerous high quality
internationally refereed journal papers. The University also successfully held
two international conferences and numerous technical seminars.
- Employee Assistance Programme (EAP)
This programme is developed by TM’s Corporate Human Resources
Division to create harmony in the work environment as well as enhance
employee productivity.
It also marked TM’s strategy to reduce organisational costs by providing
preventive education through counselling and seminars.
- Telekom Training College (TTC)
This is a training arm of TM in telecommunication training in the fields of
expertise of multimedia, engineering, marketing and secretarial services. This
is in order to increase the Group’s pool of skilled human resources as well as
upgrading the knowledge and expertise of its workforce.
(III) Internal Business Perspective
- Interactive Multimedia Services (IMS)
This category of product is currently under test and experiment where it is
currently only available only to customers of TMNet High Speed Internet
Access and limited to the MSC area. This service will be extended to other
areas when the experiment is completed as well as the broadband services is
put in place through TMNet.
This service will allow users to have instantaneous access to online
services such as telebanking, home shopping, distance learning and broadband
portal.
- 3G (Third Generation) Technology For Cellular Services
Dubbed as the next as the new technology in cellular services for its
capability of high-speed data transmission and internet access “on the go”, TM
has undertaken extensive research as well as planning in order to create a
platform for the provision of futuristic services ready for the migration towards
3G.
(IV) Financial Perspective
- Restructuring With Independent Units
The restructuring begins with the establishment of independent units,
they are TM Cellular, TM Multimedia, TM International Ventures and TM
SevicesCo.
The main aim of this restructuring exercise is provide optimal operating
conditions which will unlock a tremendous amount of value for TM’s
shareholders. This is in line with the TM’s vision of creating better returns and
enhance as well as maximising the shareholders value.
- Establishment of Investors Relations Unit
This unit has an active programme where it will consistently and pro-
actively updates investors and fund managers on the operations and activities
of the Group
The main aim is to place great importance on its obligations and
responsibility to secure the needs of its shareholders by providing accurate
and timely corporate information.
(5) SWOT ANALYSIS
(I) Strength
One of the major strengths of TM is that it is able to command a whopping 95% market share in fixed line services with over 4.5 million customers, over 70% market share as an internet service provider with close to 900,000 subscribers. Also its dominance as the leading payphone operator with the widest coverage and most number of sets in Malaysia which are significantly available in rural areas.
Besides, the vast improvement in the Group’s cash flow from RM 1,036.6 million in 1999 to RM 2,215.7 million showed that the Group is in a strong and sound financial base to make necessary investments and projects to improve its performance.
(II) Weakness
During a survey conducted by the Malaysian Communications and Multimedia Commission under the Consumer Satisfaction Survey, it was found out that TM still has some areas to work on especially in the areas like restoration of service, handling of complaints and customers in the fixed line services. While in the mobile services, it is expected to improve on its network coverage and capacity.
(III) Opportunities
One the first and foremost opportunities for TM is the converging information society. Under the Convergence Act 2005, the merging of the Telecommunications, Broadcasting and Computing industries as one will place TM in a position to capitalise on existing experience and expertise and participate in new business avenues beyond the traditional voice media option.
Secondly, with imminent of globalisation in 2007, this will provide TM an opportunity to venture into potential growth area in the Asia Pacific region as well as Africa region. This can help to further cementing relationships in countries with liberal social-economic policies conducive to supporting private investments.
Thirdly, with the expected roll out of 3G technology, it is said that with its high capability of high-speed transmission and internet access, it is an area worth exploring with the general view that consumer should be willing to pay a high premium for the product.
(IV) Threats
One the current major threats that TM could be facing is the strong competition in the bidding of the 3G technology licences. Under the concession granted by the Government of Malaysia, only 3 licences will be up for the tender. This is set against a background where currently there are other 4 major mobile services providers in Malaysia, i.e. Maxis, DiGi, Time Cell and Celcom. Besides, the threat of whether this new technology can yield a justifiable return based on its huge lay out of capital (i.e. bidding cost, R&D expenditure etc) despite this is an unproven and uncontested technology.
Secondly, in an environment where cyber crimes like hacking has been continuously reported by users of internet, TM also has a very high responsibility in this area, i.e. to provide and equip itself with advanced technology to protect the interest and privacy as well as security of its users.
Although globalisation can provide an opportunity for TM, it can also be a threat in terms of how the price and cost structure of the local telecommunications industry will change with the influx of large foreign telcos like BT of UK, AT&T of USA and NTT of Japan, etc.
(6) STAKEHOLDERS ASSESSMENT
Employees
From the financial perspective, it can be said that the Group has shown a favourable position in the Group’s overall performance. This is evident from the fact the Group’s profit before taxation has increased by 22.99% to RM1,250.8 million. This is a strong indication that the Group as a whole is able to provide a sense of stability and improvement in the terms of employees’ job security.
Secondly, in terms of productivity, the number of telephone lines per employee increased by 5.0% from 202 in 1999 to 212 in year 2000. Similarly, gross sales per employee increased to RM365,000 in 2000 from RM336,000 in 1999. Meanwhile, the average number of employees in the group has also increased from 31,641 in 1999 31,702 in 2000.
Besides encouraging performance in terms of financial performance and productivity, another encouraging sign is that the employees of TM are also keen in becoming a part (or ‘owners’) of the Group. This is evident that 59,100,000 ordinary shares have been exercised under the Employees’ Share Option Scheme (ESOS) compared against 26,900,000 shares in 1999. This is a strong indication of the trust and faith that employees have in ‘growing up’ with the Group in the future based on the strong foundation that has been built by the Group over the years.
Apart from sound financial performance, TM also explored other avenues in order to recognise and reward its employees. Among the major events is the yearly “Excellence Award” which is to recognise and appreciate the employees’ contribution and support towards the success of the Group. Besides the setting up of Telekom Training College is also aim to increase and enhance the knowledge and skills of its employees in various fields of telecommunications expertise.
Other major activities include annual “Employees’ Family Gathering Day”, yearlt event to appreciate its retired employees as well as yearly convention in assisting TM attaining world class telecommunications company status by 2005.
Lenders
For the year 2000, the total borrowings of TM has risen from RM6,162.0 million in 1999 to RM6,209.1 million. This constitutes a 0.7% increment. Also, during the year, the Gearing Ratio also saw a slight improvement from 39.76% in 1999 to 38.59% in 2000.
One of the main reasons of the slight improvement in the Gearing Ratio is due to the fact TM’s Shareholders’ Funds has increased greater than the level of borrowings due to the exercise of the ESOS by its employees.
Another reason why TM has been able to maintain a stable level of borrowings has been able to secure is the fact that TM has been able to reduce its domestic borrowings from RM2,006.2 million in 1999 to RM1,474.4 million in 2000. TM has offset this where they chose to enter into a long-dated swap, worth USD300.0 million where it will mature on 1 August 2025. The main purpose of this transaction is to effectively build up a sinking fund to repay the Debentures on 1 August 2025.
Apart from building up a sinking fund, the long-dated swap deal also enabled to secure a longer term borrowing in order to fund its rapid growing investments needed to carry out its daily operations. This is in view of ensuring the efficiency of business operations in its service areas, the quality of its network hardware and marketing tools were constantly upgraded. The total of RM1,376 million spent on operating expenditure, is an increase of 8.5% compared to 1999. The increased spending was unavoidable, as TM wanted to ensure high quality of service to meet the sophisticated needs and requirements of customers.
Lastly, with the reaffirming of TM’s long-term borrowings with the status of AAA by the Rating Agency of Malaysia, this is yet another evidence of the strong foundation TM in terms of its ability and commitment repay its borrowings.
(7) RECOMMENDATION OF ACCOUNTING TREATMENT
Goodwill
Under the current treatment of goodwill, TM has chosen a policy of
written-off the total amount arose against its reserves or shareholders’
funds during the financial year in which it arose.
For the year 2000, TM has written-off a total amount of RM3.4 million
against its Retained Profits. The immediate impact of this method is that it will
immediately reduce its shareholders’ funds by RM3.4 million.
The impact on the Shareholders’ Funds will lead to several controversial
issues First of all, the policy of immediate write-off will distort some primary
ratios This can be summarised in the table form below.
Therefore, the distortion on primary ratios could lead to the difficulty in
analysing whether TM is having a ‘strong’ or ‘weak’ Balance Sheet.
Secondly, an immediate write-off might also lead to confusion why the
Shareholders’ Funds are decreasing when TM could have made an acquisition
of real value and was generating good profits.
Thus, after looking at some of the controversial issues of using the policy
immediate write-off against Shareholders’ Funds, I suggest that TM could
adopt the method of capitalising the amount of goodwill as a permanent item
in the Balance Sheet and subject it to annual impairment test.
One of the main reasons why this method is proposed is that it is
consistent with the accounting treatment accorded for an investment in a
subsidiary, which holds the investment at cost unless there has been a
permanent diminution in value.
Besides, by capitalising the goodwill as a permanent item, it is also able to
to show a more favourable financial position to TM. As mentioned earlier,
the total amount of goodwill written-off is RM 3.4 million. If this amount is
added back to the Shareholders’ Funds, it will increase the funds to
RM 13,422.5 million. This will have an impact on the Gearing Ratio of the
year 2000 as shown in the table below.
Although the improvement might have been insignificant, but if the
adjustment has been made for previous years as well (in which the information
is not available to us), the improvement might have been significant.
Therefore, this could help to improve TM’s borrowings power if the need
arose.
Next, under this method, it is also able to reflect a truer and fairer financial
position in terms of its Net Assets as well as Shareholders’ Funds as immediate
immediate write-off will result in understatement of Balance Sheet totals.
(8) CONCLUSION
For the final words, it can be said that TM has seen a better performance for the year 2000. This is evident from the fact that there are improvements in its operating and net profit margin. This is in terms of a better overall performance in its operating activities. For the year 2001, TM expects that they are able to maintain its position as the market leader in the fixed line and internet services sectors. As for the mobile services sector, TM expect to increase its market share through extensive marketing and network upgrade to serve the prepaid and post-paid services.
As for future growth, it can be said that there are few opportunities for TM to explore. Firstly, TM has to take strong initiative and strategies to expand their overseas operations in view of the globalisation in year 2007. Next, with the imminent merging of the Broadcasting, Telecommunications and Computing industries in 2005, this will extra incentives for TM to provide its services beyond the traditional voice media option with its network and multimedia services already in place.
However, TM should also have to take strong initiative and strategies in maintaining its local operations as the expected influx of large foreign telcos will change the price and cost structure of local telecommunications arena, especially in the field of mobile services segment, which is deemed as one of the fastest growing business not just locally, but on international stage as a whole. Also, TM should take extensive R&D and planning in order to ensure that the 3G technology will be able to yield ‘justifiable’ return in terms of the huge layout of capital requirements.
From the employees’ viewpoint, the exercise of the ESOS by its employees showed that there is a high level of faith and confidence among the employees regarding the future and stability of the Group. In return, TM has taken several ways in appreciating acknowledge the services of its employees.
As for the lenders’ point of view, TM has taken a policy of maintaining its borrowings level in spite of its rapid growth in its operating activities. This is able due to the overwhelming response in the participation of the ESOS by its employees, where it has tremendously increased its Shareholders’ Funds.
Lastly, I believe that the recommended accounting treatment of capitalising the Goodwill as a permanent item in the Balance Sheet and subject to impairment test will greatly enhance its financial position in terms of showing a truer and fairer Net Assets position as well as improving its Gearing position.
Yours Faithfully,
Financial Analyst
BIBLIOGRAPHY
The following materials and websites have been used to prepare and complete the report. They are:
- The Annual Report of Telekom Malaysia Berhad
- The Star Newspapers
- The New Straits Times Newspapers
- Website of Malaysian Communications and Multimedia Commission
