This article first appeared in The Edge Malaysia Weekly on April 8, 2024 - April 14, 2024
THE telecommunications tower industry is undergoing a challenging period. Higher interest rates in recent years have investors demanding better returns and clients — typically mobile network operators (MNOs) — are slowing their fresh network rollout.
Additionally, a rise in geopolitical uncertainties is compelling certain players to adjust their geographical exposure. Last Thursday, Axiata Group Bhd announced that it was exiting its telecom tower business in Myanmar for US$150 million cash. While the price tag may not be considered a fire-sale valuation, it is still widely seen as a discount, given the deteriorating political conditions in the military-controlled nation.
Without disclosing the buyer’s identity, Axiata told Bursa Malaysia that the proceeds raised would be used to reduce debt. Analysts were generally positive on the sale as taking the Myanmar business off its books may help to entice new investors for the group’s telecom tower outfit — Edotco Group Sdn Bhd.
“We view the exit positively ahead of an impending recapitalisation of Edotco, where a process is currently in place. Balance sheet deleveraging [for Axiata] remains a key investment thesis and rerating catalyst,” says RHB Investment Bank Bhd in a note to clients last Friday.
In an earlier interview before the sale was announced, Edotco director of group strategy Gayan Koralage tells The Edge that tower companies (towerCos) are navigating a “double whammy” of higher rates but lower returns
“On the one hand, there’s the elevated cost of funds. On the other hand, the return attractiveness isn’t as high as it used to be,” he says.
“At Edotco, we’re actively managing these challenges. We embed specific terms in our long-term contracts, including escalators [clause] based on inflation and business costs, to safeguard our operations. This multifaceted approach allows us to navigate the complex industry landscape effectively, ensuring that Edotco remains resilient and continues to grow despite the double whammy of higher costs and less attractive returns.”
In addition, Edotco has adopted strategies such as repricing, increasing colocation and continuous innovation in design and structure to improve yields, says Gayan. “We continuously anchor our business plan based on industry demand and forecasts, ensuring that we target the highest return on investment across our markets. In the short term, our strategy involves repositioning from being primarily a frontier market towerCo to becoming an emerging market champion.
“This transition is part of our effort to achieve a well-balanced portfolio, which is crucial for mitigating risks associated with high interest rates. By focusing on emerging markets, we can leverage growth opportunities while managing the potential impact of fluctuating interest rates more effectively.”
According to Gayan, Edotco focuses on four key markets — Malaysia, Indonesia, the Philippines and Bangladesh — because of their growth potential and ability to generate sustainable returns. “This targeted approach allows us to manage our debt levels prudently, ensuring that our investments and expansions are both sustainable and aligned with our long-term financial health.”
Edotco is the sixth largest independent towerCo in the world. It owns and manages 58,000 towers across nine countries including Malaysia, Cambodia, Bangladesh and Sri Lanka, where it is the biggest player. Under Malaysia’s 5G rollout, it is responsible for delivering more than 25% of Digital Nasional Bhd’s network sites.
The group, which is 63% owned by Axiata Group Bhd, is the second largest independent towerCo in the Philippines and Pakistan. Its other shareholders include INCJ Ltd with 21.1% equity interest, Khazanah Nasional Bhd’s Mount Bintang Ventures Sdn Bhd (10.6%) and Kumpulan Wang Persaraan (Diperbadankan) (5.3%).
According to parent company Axiata’s disclosure to the stock exchange for the financial year ended Dec 31, 2023 (FY2023), Edotco posted a net loss of RM175.5 million compared with a net profit of RM96.5 million in FY2022, despite revenue growing 21% to RM1.86 billion from RM1.54 billion.
Axiata told Bursa Malaysia that Edotco’s bottom line was impacted by higher depreciation and amortisation from the towers it acquired in the Philippines, unrealised foreign exchange loss, one-off taxation impact in Bangladesh, higher net finance cost and impairment due to the group’s decision to exit Myanmar amid the political unrest.
According to tower industry market intelligence company, TowerXchange, Malaysia’s telecom towers stood at an estimated 43,612 at the end of the third quarter of last year, with an average 1,582 SIMs sharing a tower — typically the measure of tower density and network capacity available to service end-users.
Suresh Sidhu, CEO of telecom tower company EdgePoint Infrastructure Sdn Bhd, says that while the situation in Malaysia is vastly better than that of the Philippines, where nearly 5,000 SIMs share a tower, there is still room for improvement when benchmarked against 500 to 800 SIMs per tower in Singapore and the US.
“We expect [2024] to be a stronger year, but we also anticipate that there could still be some volatility and we just have to adjust,” says Suresh, who founded EdgePoint in April 2021, a year after resigning from Edotco as CEO in April 2020.
Apart from Malaysia, the company has a presence in Indonesia and the Philippines.
“Interest rates will remain a bit high, exchange rate volatility will be there, which impacts us a bit, of course, but also impacts our customers’ decision-making, right? So, if they [MNOs] have any cash constraints, they will hold back [their] rollout for a quarter or two,” he says.
Having said that, EdgePoint — backed by private equity (PE) firm DigitalBridge, Abu Dhabi Investment Authority and the World Bank’s International Finance Corp — has no problem delivering yield to its investors, says Suresh.
“We don’t see a problem providing good returns to our investors. I think relative return will be better if interest rates come down of course, right? We are hoping interest rates will come down, because then everybody is way better off, which we believe will happen over two or three years,” he says.
“But we are able to fund ourselves, funding any repayments or growth so far without unnecessarily burdening investors or putting ourselves in a difficult spot.”
Moreover, PE funds typically have a longer investment horizon when it comes to investing in infrastructure businesses.
“For infrastructure, it is more like seven to nine [years]. They look at a much longer time frame because you cannot possibly make a return in three years in this industry,” Suresh points out.
However, he notes that there is a need for towerCos to focus on financial sustainability when customers are tightening their belts, as liquidity is limited in times of elevated interest rates. “It requires a lot more thought. At the same time, the challenge is that the [MNOs] also are going through a bit of a cash crunch because they also have high interest rates. So, they want lower prices. You need to think more long term and you have to create a more efficient business.”
According to filings with the Companies Commission of Malaysia, EdgePoint Malaysia Holdings Sdn Bhd’s latest available financial results for FY2022, show a net loss of RM42.46 million, widening from RM16.12 million in FY2021, while revenue more than tripled to RM100.06 million from RM33.46 million.
EdgePoint Malaysia and EdgePoint Infra have a common shareholder in EdgePoint Holdco Pte Ltd.
EdgePoint Malaysia is 49% owned by EdgePoint Holdco, while Mercu Infiniti Sdn Bhd owns a 30% stake and Rangkaian Data Sdn Bhd holds 21% equity interest. Mercu Infiniti is wholly owned by EdgePoint group co-founder Muniff Kamaruddin while Rangkaian Data is 51% owned by Nor Zachy Fernandez Zahari Fernandez and 49% owned by Suresh.
With towerCos continuing to creatively adjust to tough times caused by high borrowing costs and cautious spending, their strategies are set to be tested this year as expectations for the US to cut interest rates have ebbed over the past two months.
How timing was a key factor in the birth of a regional towerCo player
When Philippines-based telecommunications giant PLDT Inc announced in April 2022 that it would be offloading 5,907 telecom towers, the market was surprised, not only by the landmark deal, priced at PHP77 billion, but also one of the buyers — EdgePoint Infrastructure Sdn Bhd.
About one year after setting up the business, EdgePoint CEO Suresh Sidhu led the company to the same side of the negotiation table as his former employer, Edotco Group Sdn Bhd. Edotco bought 2,973 towers or about half of them in a sale and leaseback deal from PLDT at PHP42 billion, while EdgePoint bought the remaining 2,934 towers.
Suresh attributed EdgePoint’s accelerated growth to “a little bit of luck with timing”, as the Covid-19 pandemic had led to the premature exit of smaller tower companies (towerCos) from the industry.
“We saw the opportunity that every country in Asean needed a second or a third credible player, so we put together a team. I had already left Edotco by then and decided to sort of see if we could build a business,” he tells The Edge in an interview.
“We found an investor — DigitalBridge — and it was willing to back us. And very quickly, two things happened: one was a number of smaller towerCos in Malaysia decided they wanted to exit, so they were looking for a buyer. Two, Centratama (PT Centratama Telekomunikasi Indonesia Tbk), which is a listed entity in Indonesia, their principal shareholder decided to sell. We officially closed with DigitalBridge as our investor in November 2020 and by February 2021, those transactions were kind of done.”
Centratama’s stock exchange filings show EdgePoint accumulating 44% equity interest in the company between February and March 2021, while major sellers at the time included the Alpha Growth Fund, Lion Trust (Singapore) Ltd and PT Trimegah Sekuritas Indonesia Tbk, which disposed of 17.1%, 18.7% and 7.6% respectively. All the transactions were done at IDR168 per share.
Subsequently in May 2021, EdgePoint announced the acquisition of Asiaspace Sdn Bhd, together with its 178 telecom towers, from its founder Datuk Abdul Ghani Abdullah at an undisclosed price. Then in July 2021, it bought another 33% block in Centratama from Clover Universal Enterprise Ltd at IDR198 per share, raising its shareholding to 77%.
EdgePoint also announced in the same month that Abu Dhabi Investment Authority had acquired a “significant minority stake” in the company and was committing to invest up to US$500 million to support the towerCo’s future growth. By November 2021, DigitalBridge announced the entry of the World Bank’s International Finance Corp as an investor in EdgePoint, but did not provide details of the acquisition.
“Why did these opportunities happen quite so quickly? We didn’t have a crystal ball. I believe Covid made people think about what they needed. I think we are probably pretty lucky with the timing,” says Suresh.
“They were always your potential targets, right? But what I didn’t know was Covid was going to happen, and so they accelerated their intention to sell.”
After three years of expansion, EdgePoint has grown its portfolio to more than 14,000 towers across Malaysia, Indonesia and the Philippines, making it the 30th largest towerCo globally as at the fourth quarter of last year (4Q2023), according to data provider TowerXchange. Edotco was the sixth largest with a portfolio of nearly 58,000 towers.
In Malaysia, Edotco is the largest independent towerCo, with 20,092 towers as at end-3Q2023, followed by Sacofa Sdn Bhd (1,890 towers) and EdgePoint (1,500 towers), according to TowerXchange.
Sacofa is 50% owned by Cahya Mata Sarawak Bhd, 20.5% by Sarawak State Financial Secretary, 15.12% by Celcom Axiata Bhd, 7.57% by Sarawak Information Systems Sdn Bhd and 6.8% by Yayasan Sarawak.
While EdgePoint is looking to expand its portfolio further, Suresh says it is not seeking new investors as the existing ones are able to support its future funding needs.
“The best thing we can do to create value in the business is run a good business. We don’t see a need for additional new investors for the time being. I think we have a good relationship [with shareholders], and they have been very supportive,” he says.
Suresh also tells The Edge that EdgePoint is not the buyer of Edotco’s Myanmar assets, shortly after the latter announced its exit plan.
Save by subscribing to us for your print and/or digital copy.
P/S: The Edge is also available on Apple's App Store and Android's Google Play.