RHB Investment Research Reports

Telecommunications - Aye to Mobile Merger

Publish date: Thu, 30 Jun 2022, 12:01 PM
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  • The regulator’s notice of no objection has removed a regulatory impediment on market consolidation that is viewed positively. The 5G policy overhang and uncertainty should still weigh on stock/sector sentiment. We expect the Government to extend the deadline for the equity stake in Digital Nasional (DNB) with a shareholder agreement likely sealed in July. We continue to prefer fixed line plays over mobile. Key risks: Competition, regulatory setbacks, and weaker-than-expected earnings. NEUTRAL; preferred picks: Telekom Malaysia (TM), Time dotCom, and OCK Group.
  • Regulatory nod… The Malaysian Communications and Multimedia Commission (MCMC) has issued a Notice of No Objection on the proposed Celcom-DiGi.Com (Digi) merger. This follows due consideration of the responses from the telcos on the Statement of Issues presented on 1 Apr. The outcome is in line with our earlier expectation that the probability of a dissenting view is low. The telcos will now seek oks from shareholders at EGMs, Bursa Malaysia for new share listings, and Securities Commission.
  • …subject to Celcom-Digi addressing concerns. The merged entity (MergeCo) is required to commit to certain undertakings to address competitive concerns. This includes the: i) Partial return of the 1800MHz/2100MHz/2600MHz spectrum, ii) setting up of an independent Mobile Virtual Network Operator (MVNO) wholesale unit, iii) divestment of Celcom’s digital prepaid brand Yoodo, iv) dismantling of exclusive dealerships in East Malaysia/East Coast, and v) creation of a single corporate brand. Overall, we view the remedies as fair, given that execution is staggered over 2-3 years post-merger completion (end 2022). Despite having to forego 70MHz of spectrum, the MergeCo would still retain 67% of the combined spectrum resources (140MHz) to support its larger/extended customer base (Figures 1 and 2). This is still ahead of Maxis, which has the second-largest spectrum block (110MHz). The regulator will reimburse the upfront spectrum costs incurred on a pro-rata basis based on the remaining years of spectrum. We believe the spectrum deficit can be compensated by optimising the current spectrum resources and some capacity investments. In our view, the structural separation of the wholesale business from retail would alleviate concerns by new/existing MVNOs of MergeCo exerting control over wholesale prices and imposing strict conditions, ie market access/segmentation. The removal of exclusive dealerships should also level the playing field, especially in areas where the MVNOs have an edge, eg Celcom in Sarawak, though the impact can still be buffered by building a strong single corporate brand, in our view.
  • Equity deal may be nigh but the devil is in the details. According to the edgemarkets.com, six telcos (including Celcom, Digi, Maxis, and U-Mobile) are likely to sign shareholder agreements in early July for a c.12% stake each in DNB valued at c.MYR200m (Figure 3). The report also said wholesale pricing will be discounted until 80% coverage is achieved by DNB (2024 target). The latter suggests some indulgence has been extended for agreements to proceed, for which the market may view positively.

Source: RHB Research - 30 Jun 2022

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