The announcement on 3 May 2023 by Malaysia’s Minister of Communications and Multimedia to allow a second 5G network to provide services once the owner of the first network, Digital National Bhd (DNB), hits 80% population coverage essentially pushes Malaysia to a dual wholesale network (DWN) model.
Valuations based on discounted cash flow would naturally be lowered because two networks are being built, but the removal of DNB as a 5G network competitor and the greater ability of mobile network operators (MNOs) to control the timing of 5G investments based on economics neutralises the lower cash flows from higher capital expenditure, said CGSCIMB in the recent Sector Note.
The national agenda of coverage for all will be satisfied by the 4G networks which are being beefed up under the government’s National Digital Network (Jendela) programme.
The increased capital expenditure requirements will weigh on telcos’ dividend upside in the near term, but by CGSCIMB’s estimates, dividends will at least hold steady in financial year 2023-2024 future versus financial year 2022 levels for Maxis and Celcom Digi (CDB). Failure to finalise 5G plans will weigh on valuations due to uncertainty, in CGSCIMB’s view.
While the Mandatory Standards on Access Pricing (MSAP) determination announced in Feb 2023 would imply a more than 50% cut in retail broadband prices, a 100Mbps service could see a 9% reduction in regulated wholesale fees, implying much smaller retail price reductions.
For Telekom Malaysia (TM), lower wholesale prices should spur retail and wholesale demand and at least hold revenues flat year-on-year in the financial year 2023 future.
“While market averaging performance leads us to maintain a neutral weighting on the overall telecoms sector, we retain preference for fixed relative to mobile operators,” said CGSCIMB.
While merger-related costs could create near-term earnings volatility for CDB, CGSCIMB believes there are significant synergy benefits from combining the strengths of the two entities to drive sector-leading financial year 2022-2025 future earnings per share growth, with early signs of these appearing in second half of 2023 future in the form of lower underlying costs. Overall for the sector, regulations provide the key upside and downside risks.
