We reiterate our OVERWEIGHT call. Issues on the single wholesale network are expected to end satisfactory as all parties concerned (including MAXIS and U Mobile) have generally agreed to the terms of the lease pricing (as reported) and are likely to sign the access agreements as early as October. We understand also that the new terms are more favourable to the telcos. Hence a reversal in share prices is on the cards once the dust settles. We also see telcos as domestically-driven plays (other than AXIATA) and hence will escape external headwinds. We reiterate that our top picks of the sector are DIGI (OP; TP: RM4.25), TM (OP; TP: RM7.95) and OCK (OP; TP:RM0.95).

Four mobile network operators (MNOs) — Celcom Axiata Bhd, Digi Telecommunications Sdn Bhd, YTL Communications Sdn Bhd and Telekom Malaysia Bhd (TM) — have executed share subscription agreements (SSAs) to collectively take up a 65% stake in Digital Nasional Bhd (DNB). AXIATA, DIGI and TM announced this latest development on Bursa Malaysia last Friday following the tabling of Budget 2023. Celcom Axiata and Digi Telecommunications are units of Axiata Group Bhd and Digi.Com Bhd, respectively. YTL Communications is a unit of YTL Power International Bhd.

The SSAs give the MNOs a 65% equity stake in DNB — Celcom Axiata (12.5%), Digi Telecommunications (12.5%), YTL Communications (20%), and TM (20%). The government retains the remaining 35% stake and holds a golden share, which grants various rights and privileges, as well as covers areas such as ownership, sale or transfer of shares on the part of the government. Digi stated that its equity stake in DNB will increase to 17.5% in the event the proposed merger between Celcom and Digi is not completed by mid-2023, with the MoF’s equity stake decreasing to 30%. This announcement confirms the MNOs’ decision to accept the proposed equity offer in DNB. The SSAs are conditional upon, amongst others, the execution of an access agreement (AA) with DNB; execution of the shareholder agreement (SHA) between all parties involved; regulatory approvals for changes required to DNB’s licences and the board charter to reflect the terms of the equity agreements.

It was also reported last weekend following the announcement on the SSAs that all four signatory parties including MAXIS and U Mobile have executed their respective AAs with DNB to lease the latter’s 5G network, subject to final board approvals with the AAs expected to be signed by the end of October. It is understood that the six telcos — including Maxis Bhd and U Mobile Sdn Bhd, who have opted out of DNB — have ironed out issues that they were facing earlier and have decided to subscribe to DNB's 5G network. We understand that this surprisingly speedy conclusion is due to: i) the initial commitment of 10 years being reduced to 3, and ii) the initial 1,200 Gbps commitment is also likely lowered. The recent Budget 2023 announcement, which stated that the government is targeting a 70% populated area coverage by 2023, will accelerate 5G subscription in the immediate term and shore up the MNOs’ bottom line.

Meanwhile, the MCMC released a public inquiry (PI) paper last week seeking to review access pricing which it last conducted in 2017. This paper seeks to regulate a new set of pricing for services provided by the telco industry comprising fixed services, 4G mobile services, 5G mobile services, infrastructure sharing and digital terrestrial broadcasting & multiplexing service for the period 2023-2025. This proposal will have a positive impact on the MNOs as 5G access pricing will substantially be reduced, thus boosting their bottom line. The paper also seeks to cut prices on other services, significantly impacting TM’s wholesale pricing. We reckon that this impact will likely be minimal, offset by increasing wholesale demand from the 5G rollout and the expanded network coverage under Jendela 2 and on top of additional value-added services that the MNOs seek in order to enhance costumer experience. We also note a positive impact on OCK as the paper proposed to increase prices on telco tower sharing.

We reiterate our OVERWEIGHT call on the sector. Our sector top picks are DIGI (OP; TP: RM4.25) and TM (OP; TP: RM7.95). We like DIGI for: (i) its superior EBITDA margin at 47%-48% vs. the industry average of 41%, and (ii) the merger with Celcom, which will give birth to a new mobile market leader with a combined market share of 44%. We favour TM for the positive tailwinds on the digital space as economies reopen and the enhanced network coverage nationwide boosting internet demand from both the public and businesses. We also like OCK (OP; TP: RM0.95) for its opportunities in tower infra in SEA and its stable, visible earnings.

Source: Kenanga Research - 11 Oct 2022