Clarity on Malaysia’s 5G plans to drive telco sector rerating

CGS-CIMB Research believes that greater clarity on Malaysia’s 5G rollout plans is predicted to have a significant impact on the country’s mobile sector. 

In a recent report, its analyst Prem Jearajasingam, suggests that this newfound transparency will allow mobile operators to make more informed decisions regarding their future capital expenditure (capex) requirements and cost profiles, ultimately driving growth within the sector. 

A key development highlighted in the report is the announcement by Malaysia’s minister of communications and multimedia, indicating that a second 5G network will be permitted to provide services once the first network, Digital National Bhd (DNB), attains 80% population coverage. 

Prem said the move towards a dual wholesale network (DWN) model may affect valuations based on discounted cash flow (DCF) models. 

However, he emphasised that the removal of DNB as a 5G competitor and the enhanced control mobile network operator (MNO) will have over their 5G investments based on economic considerations should neutralise the impact of higher capex on cashflows. 

To reflect this DWN model going forward, Prem suggested on adjustments to earnings models. 

Although discussions among industry players regarding this transition are still preliminary, he said the majority appears to be in favour of the DWN lobby. 

He pointed out that the government’s National Digital Network (Jendela) programme, focused on bolstering 4G networks, will fulfil the national agenda of providing coverage for all. 

While the increased capex requirements may limit dividend growth in the near term, he said dividend levels for Maxis Bhd and CelcomDigi Bhd are expected to at least remain steady in the financial year 2023 (FY23)-FY24 compared to FY22. 

Another crucial aspect addressed in his report is the finalisation of wholesale pricing negotiations with access seekers. 

For Telekom Malaysia Bhd (TM), he said lower wholesale prices are anticipated to stimulate both retail and wholesale demand, resulting in revenue levels that hold steady year-on-year in FY23F. 

Prem expresses a preference for fixed operators over mobile operators, with TM emerging as the top overall pick in the sector.

Within the mobile space, CelcomDigi was highlighted as the preferred choice. 

Prem suggested that TM’s conservative valuation, combined with a more modest reduction in wholesale prices, may trigger a re-evaluation of its worth in comparison to listed MNOs, which currently trade at a higher valuation. 

While the integration of Celcom-Digi and merger-related costs might introduce short-term earnings volatility, Prem emphasised the significant synergy benefits that can arise from combining the strengths of these entities. 

He anticipates sector-leading earnings per share (EPS) growth for FY22-FY25F, with early signs of these benefits potentially appear- ing in 2H23F through lower under- lying costs. 

In his report, identifies regulations as the primary factor driving both upside and downside risks in the Malaysian telecoms sector. 

Finalising 5G plans and wholesale pricing negotiations is seen as vital to alleviating uncertainty and providing a clearer path for future growth. 

As the sector gains more clarity, it is expected to witness a renaissance in both its expansion plans and valuation reassessment. TMR 


  • This article first appeared in The Malaysian Reserve weekly print edition