CGSCIMB cited today (Dec 4) that Maxis, CelcomDigi (CDB), TM, U Mobile and YTL Power have signed (identical) conditional share sale agreements to each acquire stakes in DNB and there was nothing in the announcements that has led them to believe that they need to change any views on the sector nor the companies.
CGCIMB Sector Flash Note today said TM remains their top pick in the sector for its robust fundamentals and undemanding valuations while Celcom remains their preferred pick in mobiles.
Conditions galore – final outcomes post due diligence
While the voluntary announcements made by Telekom Malaysia (TM), Maxis and CelcomDigi (CDB) showed varying terms, discussions with industry players over the weekend confirm that the terms signed by the five entities were exactly the same.
Based on the announcements, they will each pay RM100k for 100k shares each in Digital Nasional Berhad (DNB) and RM233m as a prepayment for the 5G Access Agreement signed in August 2023. These payments will be made within 5 days of conditions precedent being met.
They will each appoint a director to the board of DNB, with voting rights based on the prepayment value made.
Due diligence on DNB is expected to take 6-9 weeks and the long-stop date for the agreement is 29 March 2024. Subject to all conditions being met and a satisfactory due diligence outcome, the five entities have agreed to purchase from Minister of Finance Incorporated (MOF) RM100m worth of shares in DNB and repay RM90m worth of advances made by MOF Inc to DNB.
CGSCIMB’s take on the announcements
The signing of the agreements suggests that an amicable set of terms has been arrived at between all parties to advance the 5G network rollouts in Malaysia under a dual wholesale network (DWN) structure.
CGSCIMB maintains their base case assumption, which is reflected in their estimates, that Maxis and CDB will be the major shareholders (currently 100% each) of the two 5G networks and undertake the network rollouts.
CGSCIMB estimates for both factor in the capex and financing of these rollouts, etc. Should there be other shareholders in the networks, CGSCIMB will incorporate the minority interest elements to reflect such a situation.
The research house’s estimates for TM currently assume it rents the 5G network from a third party.
Assuming it is a minority shareholder of entity A, the financial impact will be an outflow for its share subscription and the recognition of an associate stake in its balance sheet as well as added associate income from entity A.
CGSCIMB’s positive thesis on TM and its potential to return excess cash to shareholders does not change as a result of this announcement. An outlay of RM423m (advance payment of RM233m plus RM190m in payments to MOF Inc) will do little to dent its under-geared balance sheet (0.9x net debt to EBITDA as at end Sep 23 with FY24F EBITDA of RM5.3bn).
CGSCIMB Top Picks: Telekom Malaysia and CDB for mobile pick
Top pick in the sector is TM, whose shares trade at an undemanding 12.4x core FY24F P/E with a >5% dividend yield and upside from the return of excess cash.
Within the Malaysian mobile segment, CDB is CGSCIMB’s top pick as they believe it has the greater probability of beating earnings expectations as its merger progresses.
They see conclusion of the 5G ownership/rollout issue as a catalyst for the sector while regulatory risks provide the greatest downside risk.
