Last Friday (1st December 2023), five local mobile network operators (MNOs) inked an agreement to acquire a maximum of 70% equity in the nation's state-owned 5G agency, Digital Nasional Berhad (DNB). This move precedes the implementation of a strategy to establish a second 5G network. Maxis, CelcomDigi, Telekom Malaysia, U Mobile, and YTL Communications, along with its parent company YTL Power International, are set to collectively invest approximately RM233mn (USD49.9mn) to acquire around 14% equity each in DNB. Note that the completion of the SSAs (Share Subscription Agreements) is shall be fulfilled by the later of 9 weeks from the date of execution of the SSA or 20 business days after the board of directors of DNB. Hence, the SSA is anticipated to take place from February to April 2024. To recap, in May 2023, the government declared a policy shift towards 5G, aiming to shift from a Single Wholesale Network (SWN) to a Dual Wholesale Network (DWN) model in 2024 upon reaching an 80% 5G coverage in populated area. The rationale behind opting for two 5G networks is to address potential concerns associated with DNB's monopoly status as the Single Wholesale Network. In early October 2022, DNB announced that it had executed SSAs with four telcos — namely Celcom Axiata Bhd (Celcom Axiata), Digi Telecommunications Sdn Bhd, YTL Communications Sdn Bhd and Telekom Malaysia Bhd (refer Table 1).
All in all, we are positive on the current progress of 5G development in Malaysia, as it provides a clearer pathway for local telco players to enhance their offerings. The advent of the 5G network equips all telecommunication service providers with the capability to cater to a variety of use-cases through high-speed connectivity. While we acknowledge that the profit margins for telco players might be capped in the near term due to higher investments associated with 5G (such as the injection of RM233mn into DNB and the development of new 5G-related products), we believe that MNO could explore 5G monetization by promoting appealing 5G packages. We do acknowledge the existing doubts within the business community regarding 5G implementation. However, with ongoing updates on 5G development from MCMC and the Ministry of Communications and Digital, we believe there will be a significant contribution from the business community in the medium term.
Looking at the current 5G adoption rate, as reported by the Communications and Multimedia Ministry, Malaysia has achieved 3.6mn 5G service subscriptions, representing an adoption rate of 10.8% as of 31 October 2023. Going ahead, we anticipate improved momentum in 5G development in Malaysia, as we expect the adoption rate to increase. Hence, we believe that MNOs will be able to enjoy a better contribution to their 5G-related products by the 2H24.
Given equal ownership shares in DNB according to the current SSA, TM's equity stake has decreased by -6ppts to 14%, as compared to 20% under SSA October 2022. Consequently, this resulted in a lower equity subscription for TM. Based on our back-of-the-envelope calculation, TM's equity subscription has decreased by -RM67mn to RM233mn (from RM300mn – the 20% stake under the SSA in October 2022). To recap, the initial proposed structure in June 2022, DNB's equity is valued at RM1.5bn. On the other hand, CelcomDigi stands to benefit from a reduced equity subscription in DNB, with an estimated RM142mn lower compared to the pre-merger combined subscription value of RM375mn. We are maintaining our earnings estimates at this juncture pending more details on the negotiated terms.
As of end of October 2023, DNB has achieved a 73% Coverage of Population Area (COPA) in Malaysia and aims to reach its 80% COPA target by the end of 2023. Nevertheless, the exact details of the 5G Dual Network transition remain uncertain. It's noteworthy that the government will maintain a golden share, accounting for 30% ownership in DNB. On top of that, the government will not possess any stake in the second network, underscoring its purely commercial nature. Based on insights gathered from the industry players, it seems unlikely that CelcomDigi and Maxis will be merged into a single entity. Given their pivotal roles as backbone players in the telco industry with a substantial number of mobile subscribers, we opine that CelcomDigi is better suited for Entity A. As the largest mobile network operator with a significant subscriber base, we think that excluding CelcomDigi from any risks associated with the transition from Entity A to Entity B is a prudent approach. Conversely, Maxis is expected to align with Entity B. As for TM, we think that TM is leaning towards Entity A, as the group is considered as a primary beneficiary in providing services to the public sector, such as MyGovNet. To recap, MyGovNet is an extensive telecommunication network overseen by the Malaysian Administrative Modernisation and Management Planning Unit (MAMPU), effectively linking over 10,000 government establishments within Malaysia and Malaysian embassies abroad.
We maintain our Overweight call on the telecommunication sector based on (i) positive developments in 5G rollout in Malaysia, (ii) anticipation of a gradual recovery in roaming contribution driven by a surge in migrant workers and tourist prepaid SIM card usage in line with the reopening of international borders, (iii) expectations of a positive outcome from CelcomDigi as the largest telco player in the local industry, which may attract more foreign investors, and (iv) the anticipation of a better growth in earnings potential for our local telecommunications companies due to the expected higher adoption rate of 5G in 2H2024. The downside risks to our sector call include (i) unfavorable regulatory changes, (ii) higher-than-expected capital expenditures among telco players, and (iii) strong competition, given the already-high mobile penetration rate globally.
We favour (i) TM (BUY, TP RM7.00) - the main beneficiary in providing services for public and private sector and (ii) TIME (BUY, RM6.09) – positive long-term business and attractive outlook on strong demand for data and data centres.
Source: BIMB Securities Research - 4 Dec 2023
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TMCreated by kltrader | Aug 12, 2024
Created by kltrader | Aug 12, 2024
Created by kltrader | Aug 09, 2024
Created by kltrader | Aug 09, 2024