KUALA LUMPUR (Jan 25): CGS-CIMB Research has downgraded the telecommunications sector to “underweight” and said an in-depth look at Digital Nasional Bhd’s (DNB) commercial offer shows that mobile network operators (MNOs) may have to pay substantial 5G wholesale fees from financial year 2023 (FY23) onwards.
In a sector update on Monday (Jan 24), the research house estimated that each MNO may be charged substantial minimum wholesale fees of RM303 million/RM403 million/RM432 million/RM432 million in FY23/24/25/26 respectively based on DNB’s commercial offer and timeline for site roll-outs.
“For Maxis Bhd ("reduce"; target price [TP]: RM3.80), we project this could further rise to RM577 million to RM1.5 billion per annum in FY27 to FY31, driven by traffic volume growth,” it said.
CGS-CIMB added that MNOs may not be able to generate much extra mobile revenue from 5G in the near term to midterm due to: i) a lack of unique “killer” use cases; and ii) still limited coverage in the first few years; while iii) 5G device penetration will take time to rise.
“We do see potential for new 5G enterprise revenue streams, but wide scale commercialisation may be three to five years away.
“While DNB pays for 5G capex (capital expenditure), we think MNOs’ capex will not drop much in FY22 to FY24 due to: i) JENDELA’s (National Digital Network) 4G coverage/speed targets; and ii) still growing 4G traffic.
“MNOs’ capex may fall from FY25 as they offload more 4G traffic onto DNB’s 5G network when coverage is wider and 5G device penetration is higher, in our view,” it said.
CGS-CIMB noted that when DNB’s 5G coverage exceeds 90% in FY27, "we believe smaller MNOs (such as Webe and Yes) may be able to compete more effectively versus the big four MNOs".
“Our back-of-the-envelope calculation suggests that Webe may be able to offer a 150GB 5G plan for RM60/month and still earn an EBITDA (earnings before interest, taxes, depreciation and amortisation) margin of above 30%.
“In this scenario, incumbent MNOs may have to raise their plan quotas to stay competitive, resulting in an inability to monetise 5G traffic growth or worse experience an ARPU (average revenue per user) decline/market share loss,” it said.
The research house downgraded Maxis from "hold" to "reduce", with a revised TP of RM3.80 (with a 20% discount applied to its discounted cash flow-based fair value).
“We continue to prefer the fixed segment due to better revenue growth prospects, more benign competition and less regulatory risk.
“Telekom Malaysia Bhd (TM) remains our top Malaysian telecommunications company (telco) pick, with an unchanged DCF-based TP of RM7.50.
“Key upside risks: lower 5G wholesale fees, cancellation of the single wholesale network or MNOs being offered equity stakes in DNB,” it said.