Investment Highlights

• Second 5G network expected to be rolled out early 2024 upon Digital Nasional’s (DNB) 5G network coverage of populated areas reaching 80% by the end of 2023. Entity B has the flexibility to leverage its existing infrastructure to set up 5G network and target only lucrative regions. We reckon that Entity A could consist of TM, CelcomDigi and YTL Communication, who were the first 3 telcos to agree in subscribing for equity stakes in DNB previously, while Entity B comprise of Maxis and U Mobile who previously rejected DNB shareholding participation.

• Potentially equal substantive stakes in DNB, assuming 100%-owned by telcos, including CelcomDigi, Maxis, Telekom Malaysia (TM), U Mobile and YTL Communication. The equity stakes would rise to 20% with a substantive value of RM300mil compared to the previously proposed 65% telcos’ shareholding, which implied an average RM210mil for 14% stake each.
  
  Under this scenario, we would expect the counters under our coverage such as Maxis to incur an additional RM124mil, 70% more than the previously proposed subscription of RM176mil for a stake of 11.7% in DNB. However, CelcomDigi could benefit from a RM75mil reduction in equity subscription in DNB compared to the pre-merger combined subscription value of RM378mil. For TM, the amount remains similar to previous proposed subscription of 20%.

• Winners: TM in Entity A, Maxis in Entity B. By being in Entity A, TM would benefit by taking advantage of DNB’s 5G network for its mobile segment to compensate for shortcomings in its existing mobile infrastructure while offering the company’s existing High Speed Broadband network for the 5G backhaul.
  
  In Entity B, Maxis could utilise and upgrade its existing infrastructure to set up the 5G network as the group’s infrastructure is concentrated in urban areas and in closer proximity to each other as per the requirement of 5G network. The flexibility in terms of 5G coverage allows Maxis to focus on coverage in cities and urbanised areas where customers are concentrated. If spectrum neutrality is granted by the government, Maxis can utilise its existing 4G spectrum for 5G connectivity, moderating the annual 5G access fees of RM360mil in DNB’s 5G access fees (vs. RM288mil for other telcos) and better economies of scale for spectrum costs.

• Lower fibre prices. Following the implementation of new Mandatory Standard Access Pricing (MSAP), TM has lowered Unifi’s price by average 18% with free speed upgrades that will be rolled out in stages within 3 months for Unifi existing users. Earlier last week, CelcomDigi has finalised the access agreement with TM and revised its fibre prices down between 7%-27% to be on par with Unifi’s prices. We expect Maxis to finalise the access agreement and revise prices down by the end of October 2023. In our view, Maxis and CelcomDIgi could benefit from network cost savings due to lower TM’s RAO rates, allowing 5G bundling offerings to attract more or retain existing subscribers.

• Maintain NEUTRAL outlook on the sector as the higher opex from DNB’s fixed 5G annual wholesale capacity charge on telcos and low adoption rate could more than offset rising data demand together with easing competition from the merger of Celcom and Digi. We reiterate our BUY call for TM (FV RM6.70), which has shown significant cost improvements together with compelling dividend yields. 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, in addition to stronger acceptance for Unifi Mobile under 5G coverage equality.

Source: AmInvest Research - 24 Oct 2023