After months of deliberation and postponement, Maxis Bhd (Maxis) has finally announced the signing of 5G access agreement with Digital Nasional Bhd (DNB). This marks a significant milestone for the industry as Maxis was the only mobile network operator that had yet to sign a wholesale agreement with DNB. Maxis is expected to incur operating expenses of approximately RM360m a year, which equates to 24-26% of our FY24-25F earnings forecasts. Although this may be partially offset by future cost savings from the cessation of 4G network as well as earnings contribution from the provision of 5G services in the future, we believe the group’s earnings will still be negatively impacted in the initial years. Maxis is seeking shareholders’ approval for this proposed transaction at an extraordinary general meeting (EGM) to be convened in the third quarter of this year. We maintain our Neutral rating on Maxis.

• Recap. On 20 January 2023, Maxis announced its decision to postpone the seeking of shareholders’ approval to execute the access agreement with DNB until after the finalisation of 5G implementation by the new administration following the 15th General Election. On 3 May 2023, the government announced the transition to a dual network model after DNB reaches 80% population coverage. As a commitment to support the acceleration of 5G to be in line with the government’s digital ambition, Maxis is now agreeing to sign the access agreement with DNB, subject to receiving shareholders’ approval at an upcoming EGM.

• Salient terms. The agreement is a 10-year commitment but it may be terminated earlier, among others, if the government determines that DNB will no longer be the single wholesale provider of 5G services in Malaysia or another operator is entitled to re-deploy its existing/acquire spectrum to provide 5G services. These terms are essentially to protect Maxis against the penalty of termination should the country transition to a dual wholesale network prior to the expiry of the 10-year commitment. However, delivery risks are still present in the event of poor quality of 5G services provided or a potential delay in rollout by DNB.

• Near-term earnings likely to be adversely impacted. Maxis is expected to incur operating expenses of approximately RM360m a year, though this may be partially offset by future cost savings from the cessation of Maxis’ existing 4G network and the incremental income to be generated through the provision of 5G services in the future. Nevertheless, we believe there will still be downside risk to its future earnings in the next 1-2 years. The operating expenses equate to 24-26% of Maxis full-year FY24-25F earnings estimates (before taking into account cost savings and incremental earnings from 5G).

Source: PublicInvest Research - 17 Jul 2023