THE 5G overhang in Malaysia which has been a drag to the prospect of the Malaysian telecommunications industry looks close to being resolved with the Communications and Multimedia Minister Tan Sri Annuar Musa having indicated that the six telcos have agreed to hold equity in Digital Nasional Bhd (DNB) by the June 30 deadline.
Although details pertaining to equity value and wholesale rates remain undisclosed, Maybank IB Research is of the view that regulatory risks are at least partially priced-in with telco share prices having de-rated significantly year-to-date (YTD).
“Various documents were supposed to have been signed by July 8, but there have been no further updates at the time of writing,” analyst Tan Chi Wei pointed out in a telco sector update.
“There have also been press reports quoting the Government’s equity injection (for its 30% stake) at RM500 mil which would in turn value the telcos’ 70% stake at just under RM1.2 bil or circa RM200 mil per telco.”
Given that DNB was touted to be running on a cost-recovery model and was to be wholly-funded by the telcos. Maybank IB Research does not expect a material increment in the telcos’ total outlay for DNB’s equity with changes likely limited to timing of cash injections.
“Under the 5G wholesale model, part of telcos’ capex would be replaced by opex in the form of 5G lease payments,” opined the research house.
“Assuming (the) telcos maintain their current level of network investment (thus discounted cash flow [DCF]-neutral), the higher proportion of opex which is not depreciated would theoretically be earnings-dilutive to (the) telcos.”
According to Maybank IB Research’s estimates, the cumulative market cap of the five telcos under its coverage has declined by over RM25 bil since the DNB-led single 5G wholesale network was announced.
“This is significantly more than the theoretical RM16.5 bil ‘value transfer’ to DNB, thus implying the regulatory risks are somewhat priced-in,” observed the research house.
“Nevertheless, we sense little appetite for a trade given the above-mentioned earnings dilution and generally waning appetite for regulated industries (amid an impending general election). Our telcos earnings forecasts are unchanged pending disclosure of DNB details.”
Reiterating its “neutral” stance on the Malaysian telco sector, Maybank IB Research said it continues to have preference for Telekom Malaysia Bhd (“buy”; target price: RM7.50). – July 12, 2022
Main photo credit: CIO Times
