• Top Picks: Telekom Malaysia (TM), Axiata Group, CelcomDigi (CDB). The unexpected outcome of U Mobile (UM) being selected to front the second 5G network raises more questions, in our view, with the regulatory overhang plaguing the sector likely to persist. This development vindicates our preference for fixed line/integrated telcos, given their more discernible catalysts – with TM as our preferred pick. We see the knee-jerk sell-down on Maxis and CDB as an opportunity to accumulate, as both stocks have underperformed against the FBM KLCI by 13-23% YTD.

• And the winner is… In a statement issued on 1 Nov, the Malaysian Communications and Multimedia Commission said UM has been selected to implement Malaysia’s second 5G network. There was no explanation on the basis or rationale for the decision, except for a broad comment where the regulator noted that "in the interest of maximising the true potential of 5G technology for the benefit of the rakyat, the industry, and the nation, a rigorous process has been undertaken encompassing detailed deliberations on technical and commercial aspects, among others to select the mobile network operator (MNO) that will implement the second 5G network”. We gather that Maxis and CDB are seeking further clarity from the regulator and will consider options after engaging with stakeholders. Note that the 5G Application Information Package (AIP) is not available in the public domain, which does not aid in comprehending the outcome.

• Negative surprise for the market; knee-jerk reaction on share prices expected. The development comes as a negative surprise to us and the market as the base-case expectations were for either of the two bigger peers (CDB or Maxis) to be selected. We had expected Maxis to be the frontrunner for the spectrum after analysing various permutations, having also taken into account discussions held with industry sources. In our view, the outcome does not clear up the uncertainties in the sector, but has likely raised more questions. Earlier, we postulated that the revelation of the 5G spectrum recipient may not be the be-all-and-end-all to the protracted development.

• What the market may decipher from the outcome. Some thoughts, in our view, that investors could weigh in on – in an attemptto justify the regulatory outcome – include: i) UM, being the “smallest” of the MNOs may be viewed as being the most equitable to procure the spectrum, with the regulator having an eye on further industry consolidation. The award would allow UM to significantly narrow the spectrum gap with its larger rivals, being the only MNO with 5G spectrum. This bolsters its attractiveness as a takeover target and indirectly raises UM’s valuations ahead of a potential IPO or an impending merger, in our view; ii) Digital Nasional (DNB) would still have its work cut out in the medium term with the backing of major MNOs (CDB and Maxis), and still calling the shots in the medium term as far as 5G wholesale access is concerned. We believe industry collaborations are a given, irrespective of the regulatory outcome – driven by cost and balance sheet considerations.

Source: RHB Securities Research - 4 Nov 2024