More Info On RA Telecommunications

In my earlier posting on RA Telecommunications doing a RTO of KZen, I mentioned that while the exercise looked good on paper, I needed to do more research. One of my analyst friend told me he was invited to go for the media/analyst briefing by RA a few days back, so I invited myself along. Armed with reams of presentation, did my readings, and decided to call on the management for a chat. Ended up visiting their company and talked for over two hours.



A Critical Addition To Bursa Listed Industries

As mentioned, telcos spend almost RM3bn-4bn a year locally to upgrade, test, install more coverage in the country. Surprisingly, that spending is not reflected in any listed entity as that sub industry is highly fragmented with many bit players. It is also known that big contracts are dished out to cronies who then sub them out to other small players.

Still, how can a RM3-4bn industry not be represented on Bursa? I will answer that later.

One of the main reasons why they are kept smallish is the requirement to put up significant amount of performance bond for each project. Hence capital is a major requirement for growth. Its a chicken and egg thing really.

Why Now, If It Has Taken So Long For A Player To List

This sub industry saw a dramatic shift in the way telcos operated over the last 3 years. The telcos followed the global best practices by being "asset light", not needing or wanting to own any heavy assets. A few years back, each telco has about a few hundred staffers doing all these "backend work". Working with equipment vendors, sending staff to learn about each equipments, installing, testing them, etc. If you check with the telcos now, most have a skeletal staff for its backend. Asset light, people, just concentrate on your phone, broadband and mobile services.

To do that, the trend has been to narrow the number of parties telcos wish to deal with. Maxis started a Smart Partner program, two years ago and that is what is making some of them highly attractive. Maxis has 3 Smart Partners, RA is one of the three, and apparently another one of the three is preparing itself for a similar listing exercise as well. R&A Telco, Sediabina and Instakom (the biggest player in East Malaysia) are considered to be the country's top 3 players in this industry. They are all locked by the amount of capital they have to do more jobs, they continually has to refuse to take on more jobs from some telcos. Listing is the necessary next step for them.

This, I believe, is a most important point. Sometimes when the landscape changes dramatically it gives rise to certain mini giants. Remember when there was no IPPs, then the rules change and suddenly you have IPPs wanna-bes suddenly sprouting wings. These kind of landscape change do not come often, and when they do, they alter the competitive landscape or gives impetus to the right company at the right time and place. This is as close as a parallel that I can draw for RA.



What Can RA Do?

Being a one-stop telecommunication center, R&A’s services and products include the following:-
 radio network planning and optimisation;
 in-building radio frequency design and implementation;
 equipment installation;
 commissioning and integration;
 infrastructure products and works;
 preventive and corrective maintenance;
 supply of telecommunication products; and
 project management

... which is to say every time a telco wants to upgrade from 2G to 3G or even 4G, they will have to engage them. A lot of work is done in testing and maintenance, esp frequency optimisation. All the major equipment supplies such as Alcatel, Huawei, Siemens, etc... depend on R&A to implement, install and test their equipment. The barriers to entry is high as you get bigger.

More Towers?

I was skeptical as well, I mean how many more towers can you build. Apparently that is a big fallacy, nobody really build towers nowadays. The bulk of backend work are in upgrading, testing, coverage, line stability maintenance. Vendors keep coming up with new and better equipment, and again top vendors like ZTE, Alcatel, Huawei, Siemens etc... do not want to work with 100 small players to get their stuff installed because they have to train, upgrade these "knowledge workers" from RA as well. To do it for a few companies is ok, not when you have to entertain fifty or hundred small players.



Profit Guarantee

The owners will be guaranteeing a net profit of RM8.8m for 2011, which should be met easily judging from contracts secured. They have so far hit 59% of their target by end June 2011 already. The COO did mention that the telco industry is famous for loading the bulk of work into the second half of each calender year, hence the PG should be a non-issue. Anyway, the owners' shares are collateralised against the PG if something really bad were to eventuate.

Financials

With the additional capital, I can safely say that that they are looking at a 30% earnings growth year on year for the next 2 years at least.

The company recorded revenue of RM38.75million in 2010 with PAT of 5.2million, which represents a y-o-y growth of 51.3% and 170% respectively. The tremendous growth in PAT was driven by the more than 50% gain in revenue alongside with the results of economies of scale.

The management team is positive of the company 2011’s performance and has targeted its revenue to reach RM 100million with PAT of RM 8.8million, which are 158% and 66.9% growth y-o-y respectively. The target set by the management is realistic as it has recorded RM0million in its order book as depicted in the circular approved by Bursa.

The great thing about this business is that there is almost zero bad debts. RA's estimated that they get paid within 45-60 days on signing off as all clients are major telcos.

Prospects

The management team is forward looking and has plans to engage in more corporate exercises such as M&A over the next 12 months. In addition, the group also has secured more contracts in the pipeline which has enlarged its order book.

In addition, the adoption of Smart Partnership concept (Managed Services) is targeted to increase amongst the major telco operators, and R&A is strongly positioned to capitalize upon such growth.It is likely that Celcom will be starting a similar "managed services" program to whittle down the number of candidates they have to deal with. A similar deal with Celcom will be a major boost to their revenue and profits of RA.

I asked how long is the Smart Partner contract, its a 3 years plus 2 years. Do you think telcos are going to stop upgrading their networks? On the other hand, there is a growth in the recurring revenue portion as well with managing the "sites" and acting as "24 hour service center" whenever sites are down or in trouble.

Regionally, R&A will also leverage on its close rapport and proven track records with the major technology providers such as Nokia Siemens, Alcatel-Lucent, Ericsson and Hua Wei to set its feet for expansion into Indonesia, Australia, Cambodia, Vietnam and Middle East in. Management has indicated that some of the vendors have requested RA to open in Indonesia and Vietnam so that they can do more of the same. Apparently, the "locals in those countries" are a bit harder to train.

Telecommunication industry is a booming industry with the roll out of HSBB and the upcoming 4G LTE. The exponential growth industry is driven by the increasing demand of the connectivity alongside with the proliferation of smart phones with rising data usage. In order to stay competitive, telco players are forced to upgrade its existing network to capitalize on the rapid boom of data usage. Therefore R&A’s expertise and experience in this industry would enable the company to continuously get a share of the pie.

Moreover, the household broadband penetration rate in Malaysia which is projected to reach 70.0% in 2014 bodes well for the growth in the local telecommunications network services market. The expenditure of the Malaysian telecommunication industry which is expected to increase by 5.3% to USD 7.3 billion in 2011 which includes upgrading network capacity will bring about positive revenue stream for R&A.

What's The Actual Pie?

Sure, RM3-4bn a year looks to be a lot, then why is RA only looking at RM100m in revenue in 2011? Well, it appears that at least 40% of that is in equipment, which are largely the domain of the Siemens and Huaweis. Plus you need to be "approved" to be working on Telekom Malaysia deals. So, the real pie for RA is about RM1bn. With more capital, management is confident that revenue growth will be at least in the high double digits for the next 3 years.

Being first off the block to be listed, the visibility should add more weight to garnering more projects. Knowing that the local market is still limited in size, they have plans to move to Jakarta and Hanoi within the next 6-12 months.

Conclusion

Its certainly one of the better RTOs/IPOs in recent times. The industry is right and investors are more than likely to be catching this counter at the right start of a wave for the company's prospects.

At 25 sen its 25x 2011 earnings based on the PG. In all fairness, the counter should be vetted on 2012 earnings which I expect to be in the vicinity of RM11m-12m thanks to the capital injection. The PER should be whittled down rapidly within 12 months. Hence I see a sustainable trading range of between 24 sen-32 sen for the counter. Plus, an important final point, I like the management's vision, clarity of purpose and understanding of its environment and industry - can't put a price on that.

NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.