Details of the announcement on the 5G special purpose vehicle (SPV) for the telecoms industry remain limited at the moment. Meanwhile, Macquarie Equities Research (MQ Research) looks at a potential 5G rollout option, with its top pick being Telekom Malaysia, followed by Maxis.

Event

• MQ Research spoke to various industry players in recent weeks to get a sense of what the announcement of the 5G special purpose vehicle (SPV) means for the industry. The reality, as MQ Research understands it, is that operators are only meeting with reps from Digital Nasional Berhad (DNB), the 5G SPV, during the week of 22 March and, until then, operators are unable to provide details to the market. What MQ Research is clear about, as articulated in its recent report, is that infra providers should benefit from the 5G network rollout, while mobile operators will de-risk in the near term from not having to (speculatively) build a new network. Below MQ Research looks at a potential option to achieve the already-stated goals of a 100%-government-owned network with investments coming from the private sector.

Impact

• Learning from the power sector to build a network. Utilising the Malaysian power sector as a blueprint, MQ Research hypothesises the SPV-driven 5G network as follows : 1) divide the country into multiple 5G districts (say 100), 2) industry players, the regulator and other stakeholders formulate a timeline and user outcomes required for each district, 3) a technical team (including the operators) draws up the parameters for rollout, 4) based on the set technical parameters, consortiums comprising operators, vendors and financiers etc bid to provide the network in the district, 5) the winning party sells capacity to the SPV and 6) the SPV provides access to access seekers at a wholesale price. The most crucial step, in MQ Research’s view, will be setting the parameters for the networks (and the upgrade paths) in each district.
• Setting the wholesale price. Again, using the power sector as a template, the wholesale price could utilise a regulated asset base (RAB) multiplied by a regulated return (ROA) for each regulatory period. Revenue caps can be set for assets such as transmission and backhaul components while price caps can be set for radio and other variable elements. Ultimately the higher returns in certain districts will compensate the SPV for the higher cost per unit in less densely populated, and thus less economically viable, districts.
• Industry economics. For mobile operators, the ability to participate in the rollout/ownership of the network elements will allow them to secure longer-term returns. With 4G likely to be a key source of revenue for years (>5) to come, MQ Research believes medium-term economics are preserved. Of course, in the long run, how future network rollouts are handled will determine whether mobile network operators stay as such or become mobile virtual network operators (MVNO), with service innovation driving profits.

Outlook

• Telekom Malaysia remains MQ Research’s top pick in the sector with Maxis its preferred mobile pick for its Enterprise segment driving mid-term growth.

12-month Target Price Methodology

• TM: RM8.02 based on a discounted cash flow (DCF) methodology
• MAXIS: RM5.82 based on a DCF methodology
• TIMECOM: RM16.70 based on a price-earnings ratio (PER) methodology

Source: Macquarie Research - 24 Mar 2021