• DNB announced the completion of share subscription agreements with four mobile network operators (MNOs): Maxis, YTL Power, CelcomDigi, and U Mobile - each acquiring a 16.3% stake.

• We are positive about the progress of 5G development in Malaysia, as it paves the way for local telecommunications companies to significantly enhance their service offerings.

• Maintain Overweight call on Telco sector with a BUY rating for TM (BUY; RM7.08) and TIME (BUY; RM6.09) which emerge as our top pick.

DNB Completes Share Subscription Agreements with Four MNOs. On 28th June 2024, DNB announced the completion of share subscription agreements with four mobile network operators (MNOs), i.e., Maxis, YTL Power, CelcomDigi, and U Mobile, each acquiring a 16.3% stake. The Malaysian government, represented by the Minister of Finance Inc. (MoF), retains a 34.9% stake and a Special Share in DNB. This follows the fulfillment of conditions precedent under the SSAs on 20 June 2024, allowing the four MNOs to increase their equity stake in DNB. For Telekom Malaysia (TM), the conditions precedent longstop date is 21 August 2024. If TM completes the SSA, MoF Inc.'s stake will reduce to 30%, with the MNOs collectively holding 70%. The Shareholders Agreement details the transition to a dual 5G network model and provides MoF Inc. with options to sell its shares and transfer its shareholder advance in DNB. Following the exercise of these options, an equity restructuring will occur, categorizing shareholders into two groups: those staying with DNB and those selling their shares to the remaining shareholders.

Our View.

Overall, our optimism about Malaysia's 5G development remains strong, offering local telco players a clear path to enhance their services. The rollout of the 5G network empowers telecom providers to support a diverse array of applications with high-speed connectivity. However, we opine that value-added services will be crucial for operators to expand their influence in 5G and deliver enhanced value to their customers, going beyond mere speed improvements. Despite initial concerns in the business community, ongoing updates from the MCMC and the Ministry of Communications and Digital are expected to ease these concerns, fostering significant business growth in the medium term. As of April, Malaysia has achieved 13.2mn 5G subscriptions, marking a 13.2% adoption rate. Looking ahead, we anticipate TM will complete the SSA, likely favoring Entity A due to its pivotal role in serving the public sector through initiatives like MyGovNet. Entity B, however, will need time to launch its 5G network. Regulatory guidelines stipulate that 5G spectrum resources will be evenly split between Entity A and Entity B, requiring Entity B to match DNB's coverage. During this process, we think that there may be financial considerations, including potential compensation to Entity A for temporary use of its infrastructure or services.

Maintain OVERWEIGHT. Maintain an Overweight call on the telecommunications sector, driven by (i) positive developments in the 5G rollout in Malaysia, (ii) better 5G monetization due to certainty on the final structure for Malaysia's 5G network, supported by attractive 5G-related bundling packages, (iii) higher investment in data centers, which will enhance 5G deployment and increase monetization opportunities for data-intensive businesses in the enterprise segment, (iv) anticipation of higher 5G adoption rate, as well as (v) expectations of a gradual recovery in roaming contributions due to increased usage by migrant workers and tourists, as Malaysia's tourism sector aims to welcome 27.3mn tourists in 2024. Our preferred picks are (i) TM (BUY, TP RM7.08) – considered the main beneficiary in providing services for both public and private sectors, and (ii) TIME (BUY, RM6.09) – with a positive long-term business outlook and an attractive stance on strong demand for data and data centres.
 

Source: BIMB Securities Research - 1 Jul 2024