• Sector picks: Telekom Malaysia (TM), Time dotCom, and OCK Group. With the equity stake sale in Digital Nasional (DNB) executed, the telcos will now move on to ink commercial wholesale agreements – a condition precedent. We maintain our NEUTRAL sector call, as we see 5G monetisation challenges – even with wholesale rates being more accommodative – leading to medium-term earnings dilution.

• Equity sale inked… TM, DiGi.Com (Digi), and Celcom have announced share subscription agreements for the purchases of 20%, 12.5%, and 12.5% stakes in DNB, the 5G single wholesale network (SWN) provider, for a total consideration of MYR643m, valuing it at c.MYR1.4bn. With the other 20% stake taken up by YTL Communications, the telcos’ combined shareholding works out to 65% – the 35% balance is to be held by the Ministry of Finance (MOF), which has a golden share. Adjustments were made to individual stakes after Maxis and U-Mobile pulled out from the share offer earlier. Under the share sale terms, no single mobile network operator (MNO) can own >20% in DNB and, in the event of a merger, the merged entity’s shareholding is capped at 25%. If the Celcom and Digi merger is not completed by 30 Jun 2023, both will subscribe additional shares up to a maximum holding of 17.5% with MYR113.1m in additional outlay. The shares will be sold down to meet the 25% regulatory cap.

• …wholesale agreements next. The equity sale exercise is conditional upon the telcos’ inking 5G wholesale agreements by month’s end (30 Oct), approval of the Minister of Communications & Multimedia for changes to the National Facilities Provider, and National Services Provider licenses, relevant consents and waivers to be sought from DNB’s financiers, Ericsson and shareholders’ approvals (Digi) amongst others. On 8 Oct, The Edge Markets reported that all six MNOs reached agreements on the terms of the access agreements with DNB, pending final board approvals.

• Minimal impact to TPs. Assuming the share subscriptions are entirely debt funded, we estimate net gearings for TM, Digi, and Axiata will increase marginally from 0.68x, 8.2x, and 1.20x to 0.72x, 8.55x, and 1.21x. Net debt/EBITDA would rise from 1.07-2.48x to 1.13-2.49x. As the impact to our TPs on the stocks is minimal at 0.4-0.7% – after factoring in higher net debt (Figure 3) – we make no change to our TPs and ratings for now.

• 5G population coverage at over a third. In a press release, DNB anticipates the MNOs will commence the rollout of 5G services this month with access agreements to be executed soon. We note that TM, Digi, and Celcom have conducted network integration trials with DNB as part of the access request. DNB’s 5G coverage has reached 33% of the population (spread across Kuala Lumpur, Cyberjaya, Putrajaya, parts of the Klang Valley, Johor, and Penang) against a target of 40% by end 2022. At the recent 2Q22 JENDELA progress update, the regulator said DNB’s 5G network deployment may be hampered by red-tape at state level.

• Key risks: Competition, regulatory setbacks, weaker than expected results.

Source: RHB Research - 11 Oct 2022