This article appeared in The Edge Markets on 17 March 2022.

KUALA LUMPUR (March 17): The government’s plan to offer a 70% stake in its fully owned firm Digital Nasional Bhd (DNB) to mobile network operators (MNOs) is positive to the telecommunications sector as it may accelerate 5G rollout at lower cost and with better governance, say analysts.

CGS-CIMB Securities analysts Foong Choong Chen and Lam Hsien Jin said in a note they see the government’s 5G decision as potentially positive for MNOs.

With a 70% stake, they opined that MNOs may be able to better steer DNB’s 5G network rollout, such that it lowers the current total cost of RM16.5 billion (inclusive of RM4 billion corporate cost), and raise the proportion of leasing from MNO-owned sites.

“With this, coupled with a lower reliance on debt, DNB may be able to cut the 5G wholesale fees and change the charging structure to be more traffic-based, in our view.

“This would hit MNOs’ earnings less, while any share of DNB’s net losses will only be accounted for via a reduction in the investment value in the MNOs’ balance sheets,” they said.

According to them, having equity ownership also gives MNOs greater assurance that DNB will continue to be well managed in the longer term.

However, pending the final outcome from the government’s negotiations with the MNOs, the CGS-CIMB analysts maintained their “underweight” sector rating.

They preferred the fixed to mobile segment due to better revenue growth prospects, more benign competition and less regulatory risk. Thus, Telekom Malaysia Bhd (TM) (target price [TP]:RM7.50) remained their top Malaysian telco pick.

AmInvestment Bank analyst Alex Goh is also positive on the latest development as he viewed telcos’ equity participation in DNB as potentially improving corporate governance oversight for DNB with its own wholesale subscribers representing the majority of its board of directors.

“However, this could be partly negated by the government’s golden share ownership which could mean overruling the appointment or dismissal of top management,” he added.

He noted that while DNB had earlier envisioned substantive 5G wholesale fixed capacity charges to support its own bond-raising requirements, this funding structure and timeline could be revised by new equity investors who are its own offtakers that could influence the company’s pricing mechanism, procurement strategies and cost management.

“For now, we maintain the earnings forecasts and fair values of the stocks under our coverage pending further clarity on DNB’s equity and wholesale pricing structures,” Goh said.

He maintained a neutral outlook on the sector as the higher operating expenditure (opex) from DNB’s fixed 5G annual wholesale capacity charge on celcos could more than offset escalated data demand and easing competition from the consolidation of two major cellular operators amid a stagflation outlook which could depress subscriber affordability.

He reiterated his “buy” call for TM (TP: RM7.08), which has shown significant cost improvements together with compelling dividend yields.

Meanwhile, Affin Hwang Investment Bank analyst Isaac Chow said the deployment of a consortium of telcos is more effective, and the current arrangement is the next-best option for the MNOs.

According to him, the sale of the 70% stake in DNB to MNOs should help ensure greater oversight and transparency of the former, better alignment in interests between DNB and the MNOs (on cost, quality of services, coverage) and enable the MNOs to benefit from any positive returns generated by DNB.

“That said, the full benefits of this arrangement will hinge on the government’s asking price/ valuation of DNB, and whether the shares will be ranked pari passu,” he said.

He maintained his “neutral” rating for the telco sector. Based on DNB’s previous guidance on plans and pricings, and his analysis, he believes the impact on MNOs will be mixed.

“We anticipate the 5G wholesale fee to erode the MNOs’ short-term profitability. Taking a longer view, we anticipate the MNOs to swiftly adjust their opex/capex deployment and monetisation strategy and to adjust to this new business model by 2024-25,” he said.

For exposure, he likes TM (TP: RM6.30) for its extensive fibre infrastructure, robust demand for fixed broadband services and attractive valuation vis-à-vis the mobile operator.

TA Securities analyst Wilson Loo, on the other hand, said that the government’s latest decision clears the long-drawn uncertainty on Malaysia’s approach to 5G rollout.

“While maintaining its stance for 5G rollout via the single wholesale network (SWN), the government’s renewed decision to accelerate equity participation by MNOs in DNB by June 2022 instead of 2024 is a positive move, in our view,” he said.

He believes MNOs, including Malaysia’s big four (Celcom Axiata Bhd, Digi.Com Bhd, Maxis Bhd, and U Mobile Sdn Bhd), would be keen on 5G rollout via the SWN model as the opportunity to become shareholders of DNB, which has been deemed monopolistic by certain quarters, would provide them comfort over its governance and transparency.

He also expects a private-public partnership for 5G rollout to be supportive of DNB’s adoption of a cost recovery and supply-led approach to accelerate deployment at lower cost.

However, he highlighted the risks to execution of the SWN model arising from potential disagreements/uncertainty over: i) shareholding structure, and ii) wholesale pricing, commitment, and duration.

“Above all, we do not see the eventual commercialisation of 5G via a SWN model as a looming threat to the market share of incumbent MNOs including Celcom, Digi, and Maxis. This is given that their dominant 4G networks are expected to remain relevant while 5G networks rollout and 5G devices adoption progress over time.

“Rather, to drive 5G monetisation, we expect them to focus on the enterprise segment such as with the use of 5G network slicing to offer differentiated solutions, albeit contributions are likely to be more meaningful over the medium term. Lastly, assuming uptake of stakes in DNB, they are also expected to benefit from growing 5G traffic over the long term,” Loo said.

With maintenance of the SWN, he also continues to view TM (TP: RM6.80) as a beneficiary of Malaysia’s 5G rollout.

“Overall, we reiterate our ‘overweight’ recommendation on the telecommunications sector,” he said.

At noon break, TM rose three sen to RM4.95; Digi added one sen to RM4.02; Axiata climbed four sen to RM3.78; Maxis gained one sen to RM4.20.