Cover Story: Telekom on the prowl for M&A, JV to grow new digital services unit Credence

This article first appeared in The Edge Malaysia Weekly, on May 16, 2022 - May 22, 2022.
Klang Valley Data Centre in Cyberjaya

Klang Valley Data Centre in Cyberjaya

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WITH 5G and digital services being two key growth areas, Telekom Malaysia Bhd (TM) is actively seeking partners and solutions in the digital space to strengthen its value proposition. And it is not discounting the possibility of acquisitions or joint ventures taking place this year.

“That [the need to invest to be better positioned for new growth areas] is partly why we are looking at conserving our cash position,” its managing director and CEO Imri Mokhtar tells The Edge.

“We are actively scouting the market [for acquisitions]. As we go into more specific projects, for example, we do need to acquire some of these specialists or boutique technology companies to complement [our portfolio].”

Deals being sought include cloud computing, smart workforce, productivity and specialised industry-based solutions to bolster its in-house capabilities, given that the business-to-business digital services market in Malaysia is forecast to grow at an average of 16% a year — from RM22 billion in 2022 to RM41 billion in 2026.

“Digital is an area we are investing in, including talents — not just in digital but also mobile — that [TM] previously could not attract and bring in. We will continue to do so because these are two growth drivers,” the 48-year-old says, acknowledging the need for the 75-year-old institution to add new expertise to its core competencies to better serve customers going forward.

A new digital services business unit, TM Digital Innovations Sdn Bhd, also known as Credence, has been set up to serve enterprise and public sector customers. It has been tasked to pursue a top-line growth of 10 times and is expected to contribute at least 10% to its parent company’s valuation by 2026.

“Our strategy may not be that different from what some regional telcos have set out to do. But it is really in the execution. So, we know where our strengths are in terms of the fixed DNA and [will bolster] areas like digital and mobile that are not the natural DNA,” says Imri.

Credence CEO Krishnendu (Krish) Datta, a 56-year-old Singaporean, has more than 34 years of technology industry experience, having built and led several enterprise tech-based businesses across Asean, Australia, Japan, India and the Middle East, according to TM’s 2021 annual report. The former SAP senior executive is also co-founder and CEO of Xampr, which started a no-code, low-code platform for mobile application development, focusing on integration, last-mile process and flexible template-based workflow and adoption. The art lover also co-founded an online art platform, MayinArt.

Regional unit in the making?

According to Imri, Credence, which focuses on smart solutions, will likely be more project-based but it will work alongside TM One (its business-to-business arm), TM Wholesale and unifi (consumer retail) where applicable. The digital services business unit will likely serve customers in Malaysia initially, but it could also take on foreign projects if the opportunity arises, and may be spun off as a standalone entity in the future.

“One thing that’s interesting about digital is that it is asset-light. A solution that has been developed for manufacturing, education or even healthcare here can be brought to other countries as well,” says Imri.

“You can’t just bring broadband or mobile to other countries. It requires a heavy investment in infrastructure,” he adds, noting that Japanese IT services and consulting company NTT Data Corp is listed separately from its parent telecommunications company Nippon Telegraph and Telephone Corp (NTT).

Singapore Telecommunications Ltd’s (Singtel) information and communications technology (ICT) services unit NCS — founded by the Singapore government four decades ago in 1981 to harness the power of IT for the public and private sectors — is no longer a unit under Singtel’s Group Enterprise as it seeks growth outside the island republic, reportedly with a focus on Australia and greater China.

NCS — whose recent projects include a partnership with Grab and autonomous vehicle company Neolix to pilot an outdoor weather-proof autonomous vehicle robot food delivery service (that runs on Singtel’s 5G network) to serve guests on Sentosa’s beaches and food and beverage merchants at Siloso Beach — has made several acquisitions to expand its network of clients, partners and local expertise to advance its reach into new segments in the digital and cloud services space.

Credence will benefit from its parent company’s long-standing network and relationship with the public and corporate sector, and will likely be among the beneficiaries when the government looks at migrating 80% of public data to the hybrid cloud by end-2022 under its “cloud first” strategy.

Just as TM was among the four parties given conditional approval to build and manage hyperscale data centres in the country when the Malaysia Digital Economy Blueprint was unveiled in February 2021 as part of the MyDIGITAL initiative, the telco was also among the four cloud service providers that signed a cloud framework agreement with the government on May 9 to drive the digital transformation of the private sector by upgrading the Public Sector Data Centre to a cloud computing service known as MyGovCloud. The other three cloud service providers are global giants Microsoft, Amazon Web Services (AWS) and Google Cloud, which have partnered Enfrasys Solutions Sdn Bhd, Radmik Solutions Sdn Bhd and Awantec System Sdn Bhd respectively. TM’s partner managed services provider is Cloud Connect Sdn Bhd.

Fight for talent, assets

Still, TM will likely face intense competition for talent, expertise and assets, especially since its larger rivals have had a headstart in positioning themselves to capture the enterprise market.

Maxis, which is positioning itself as a digital-first converged solutions provider to capture the burgeoning enterprise market, started as early as 2020 with two so-called “acqui-hire” deals: cloud solutions company Infrastructure Consulting & Managed Services (ICMS) and unified communications and voice cloud solutions company Audionet (M) Sdn Bhd. To gain a talent pool of 70 qualified engineers and support team, Maxis proposed last October to acquire network and security services company MyKRIS Asia Sdn Bhd for up to RM157.5 million from LEAP Market-listed MyKRIS International Bhd.

In January 2021, TIME dotCom Bhd paid RM58.7 million for 60% of AVM Cloud Sdn Bhd to accelerate the growth of cloud computing as a new business pillar alongside its fibre broadband services, global network connectivity and data centres. The acquisition contributed to the growth of its enterprise revenue.

Is TM late to the game?

“It is still a growing market. Is it late? Not really. There are other good potential companies. For us, it is important to get the right company. That’s why we are not looking just at Malaysia. It could be a regional-based company as well,” says Imri.

Data centre deal talk

To be sure, TM One already provides enterprise and public sector customers with end-to-end managed services, which it says is supported by secure digital connectivity and reliable infrastructure. TM One, which describes Cloud  Edge as its own artificial intelligence-powered hyperscale cloud service, also offers cybersecurity solutions. Its unit VADS Bhd has nine data centres, three of which are Tier III-rated. Its Klang Valley Data Centre (KVDC) in Cyberjaya and Iskandar Puteri Data Centre (IPDC) in Johor are positioned as twin-core data centres, which TM says are the first of their kind.

Still, competition is heating up and there are at least 40 data centres in Malaysia, including those owned by Maxis, TIME dotCom’s AIMS Data Centre, NTT Global Data Centres and Regal Orion from Japan, Keppel Data Centres and Bridge Data Centres from Singapore and Alibaba Cloud and Huawei Cloud from China. More of these are being built.

Petroliam Nasional Bhd (Petronas) and Celcom Axiata Bhd will reportedly be tenants of Microsoft’s data centre in Malaysia, with the tech behemoth pledging in 2021 to invest US$1 billion over five years here. On April 24, China-based GDS Holdings Ltd held a groundbreaking ceremony for its hyperscale data centre in Nusajaya, Johor, that is slated for completion by 2024.

Asked to comment on talk that TIME dotCom is weighing strategic options for its data centre business and could possibly raise US$500 million from selling a part of AIMS Data Centre to infrastructure funds, Imri says TM isn’t considering a sale of its data centres at the moment and would prefer to build and grow its own instead of buying them.

While there are no plans to sell just yet, the fact that there are already listed data centre real estate investment trusts (REITs) across the Causeway (Digital Core REIT) and the US means that there is an opportunity to monetise these assets down the road as they mature.

In the meantime, investors may receive smaller dividends as TM invests in new growth areas. The telco, which pays out 40% to 60% of its annual profit, paid out RM490.6 million (13 sen per share) in dividends for FY2021 versus RM539.6 million (14.3 sen per share) for FY2020, despite earnings (excluding amortisation) growing year on year.

“We are investing for growth [and] are among the better performing telcos. It is a balance between what we return to our shareholders in dividends versus what we will need for our future growth. We are mindful [of both] and we believe that our current dividend policy is robust enough to address any considerations [and concerns] of our shareholders and our need to invest for growth,” says Imri.

According to him, TM — which spent RM1.7 billion, or 14.7% of its revenue, on capital expenditure last year and expects capex to be between 14% and 18% of revenue this year — will still see a “gradual increase” in capex in the next few years as it “continuously invests to future-proof and support [its] aspirations”.

“We are committed to delivering value to shareholders as well as continuing our nation-building role to provide connectivity excellence towards enabling a digital Malaysia. We are committed to driving sustainable growth, creating shareholder value and enabling a much more digital society, government and industry.”

 

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