• A second plunge. Four mobile network operators (MNO) and the incumbent fixed line operator have inked conditional agreements to acquire a combined 70% of Digital Nasional (DNB), with the option to purchase the remaining 30% stake from the Ministry of Finance (MoF). The deal is subject to due diligence and conditions precedent (CPs), and hence, could still fall through. We keep our NEUTRAL sector rating, and prefer fixed line plays. Top Picks: Time dotCom and OCK Group.

• Equity infusion values DNB at MYR1.6bn. The four MNOs – CelcomDigi (CDB), Maxis, YTL Communications, U Mobile and the incumbent fixed line operator – have entered into conditional share subscription agreements (CSSAs) to acquire a 14% stake each in DNB, the 5G single wholesale network (SWN) operator for MYR233.3m – valuing DNB at MYR1.67bn. The deal is subject to due diligence and the fulfilment of CPs, and is slated for completion by early 2Q24 with formal shareholder agreements to follow. Shareholder approvals are not required for Maxis and CDB.

• Exit clauses provided for. The equity injection represents a shareholder advance in the form of prepayment of 5G access charges, and reflects the industry’s commitment in ensuring that DNB meets its objectives. The telcos have the option to acquire MoF’s remaining 30% stake in DNB after the 80% population coverage target (7,509 sites) is met, thereby raising their effective stakes to 20% each, for an additional MYR190m. We expect the final terms of the shareholder agreement to contain specific provisions for DNB investors to exit – as the case may be – to pursue the second 5G network (Entity B).

• Transition to second network can only happen when DNB meets its rollout target. As expected, one of the CPs included is an undertaking that only investors in DNB are allowed to partake in the second 5G wholesale network (Entity B). This compels access seekers to commit to DNB’s supply driven/cost-recovery model and coverage target. Other notable provisions include consent to be procured from the network vendor (Ericsson) for the change in DNB’s ownership and board composition.

• Explicit terms in the 5G access agreements (AA) allows access seekers to terminate the AA with DNB. We note a term stipulated in the 5G wholesale AAs inked with DNB allows access seekers to terminate the AAs if DNB is no longer the 5G single wholesale network provider. As DNB’s coverage is already extensive and Entity B will take some time to roll out, we think the latter will still need to “roam” on DNB’s network in the interim. The regulator had previously stated that 5G spectrum resources will be equally distributed between both Entity A and Entity B, and the latter will need to ensure its coverage is on par with that of DNB. This means that a ministerial direction would be required to cancel DNB’s exclusive rights for the provision of 5G access issued on 31 May 2021.

• Key downside risks for the sector are competition, weaker-than-expected earnings and regulatory setbacks. The opposite constitutes upside risks.

Source: RHB Securities Research - 4 Dec 2023