Investment Highlights

• Rolling out with single 5G network. The Communications and Multimedia Ministry (CMM) and the Ministry of Finance (MoF) jointly announced that the Malaysian government will proceed to roll out 5G via Digital Nasional Berhad (DNB) on a single wholesale network (SWN) model as opposed to a dual wholesale network (DWN) structure as publicly proposed by the 4 big cellular operators (celcos) Celcom, Digi, Maxis and U Mobile – which allows private telco operators (telcos) to form a consortium to develop a competing network against DNB.

• Telcos can invest up to 70% in DNB. As a concession, the government also proposed to offer up to a 70% equity stake in DNB to private telcos that are committed to signing a wholesale access agreement. With the new proposed structure, the government will reduce its equity in DNB from 100% to 30% while holding a golden share. Discussions between DNB and the telcos will be held on the details of ownership and equity valuation with an agreement expected to be finalised by the end of June this year. We reckon that pricing valuations will be reasonable based on DNB’s future investment and financing requirements.

• Ensuring policy continuity. DNB will continue to be regulated by the CMM via the Malaysian Communications and Multimedia Commission (MCMC) while the MoF monitors DNB’s administration and shareholding structure. According to Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz, the decision to retain the SWN model is the government’s firm stance on ensuring policy continuity of DNB’s existing plan, equipment procurement and appointments of local companies involved in the development of 5G. Recall that DNB, which will own, execute and manage 5G spectrum together with the infrastructure that is expected to cost RM16.5bil, has appointed Ericsson to design and build the national 5G network at a total cost of RM11bil. This comprises RM7bil for tower rental and fibre leasing costs over a 10-year period and RM4bil for network equipment, deployment services, ongoing maintenance and network management. Under Phase 1 of the 5G rollout, DNB aims to achieve 40% population coverage by the end of 2022 and 80% by the end of 2024.

• Supports public-private partnership and national prerogatives. The decision supports a strong public-private partnership model as well as an established private sector financing ecosystem which will help to boost investor confidence in Malaysia. Communications and Multimedia Minister Tan Sri Annuar Musa said the retention of the SWN model will enable high-quality and equal access to 5G at an affordable price to help speed up economic recovery after the pandemic, while helping to bridge the digital divide in rural areas. DNB is expected to keep its promise of wholesale 5G data pricing of less than 20 sen per GB.
  In July last year, the MCMC, which allocated the 700MHz, 3500MHz and 28GHz spectrum exclusively to DNB, removed technology neutrality for existing spectrum to prevent telcos from rolling out 5G services with the current 2300MHz and 2600MHz bands. Annuar told Parliament last year that while telcos were technically able to use their current 4G spectrum for 5G, it would affect the SWN model by DNB if they were allowed to do so.

• Improving project clarity and corporate governance. We are positive on this development and not surprised by the government’s SWN option, which has been promoted over the past 2 years and provides project clarity on Malaysia’s 5G rollout structure. For telcos’ equity participation in DNB, we view this as potentially improving corporate governance oversight for DNB with its own wholesale subscribers representing the majority of its board of directors. However, this could be partly negated by the government’s golden share ownership which could mean overruling the appointment or dismissal of top management.
  We note that while DNB had earlier envisioned substantive 5G wholesale fixed capacity charges to support its own bondraising requirements, this funding structure and timeline could be revised by new equity investors who are its own offtakers that could influence the company’s pricing mechanism, procurement strategies and cost management. For now, we maintain the earnings forecasts and fair values of the stocks under our coverage pending further clarity on DNB’s equity and wholesale pricing structures. 
  Recall that DNB had proposed 5G fixed capacity charges that could annually reach RM400mil–RM500mil for each of the 3 largest celcos, which is unlikely to be offset by higher revenue growth in the first 1–2 years. DNB’s 5G wholesale structure has removed intense capex requirements from fixed and cellular operators, who now need to only focus on marketing and customer service support. However, concerns have arisen that this could be more than offset by higher opex, driven by the introduction of fixed 5G annual capacity charge in the near-medium term while increased revenue from escalated data demand is likely to be progressive against the backdrop of scant widespread applications for consumers currently.
  YTL Communication’s YES is the first and only telco to offer 5G services using DNB’s network currently as the wholesale capacity charge is likely to be manageable given the operator’s low subscriber and data needs. While Telekom Malaysia (TM) has also signed to participate in DNB’s 5G user trial, unifi mobile has yet to introduce its 5G offering to consumers.
• Maintain NEUTRAL outlook on the sector as the higher opex from DNB’s fixed 5G annual wholesale capacity charge on celcos could more than offset escalated data demand and easing competition from the consolidation of 2 major cellular operators amid a stagflation outlook which could depress subscriber affordability.
  We reiterate our BUY call for TM (FV RM7.08), which has shown significant cost improvements together with compelling dividend yields. Additionally, TM’s critical role in Malaysia’s MyDigital initiative with its ownership of the High-Speed Broadband network will underpin a faster pace of growth for the group’s wholesale revenue. Likewise, TM One’s revenue growth could also be accelerated over the longer term by the group’s appointment as the sole Malaysian cloud provider for government data.

Source: AmInvest Research - 17 Mar 2022