New DWN 5G model expected to drive Malaysian telco growth

Malaysia wholesale 5G DNB DWN
Image by Anton Medvedev | Bigstockphoto

The growing clarity surrounding Malaysia’s 5G rollout and plans for a future dual wholesale network (DWN) model is expected to significantly influence the country’s mobile sector, according to CGS-CIMB Research. Analyst Prem Jearajasingam predicts this transparency will facilitate more informed decisions regarding future capital expenditures and cost profiles, ultimately driving sectoral growth.

Recently, Communications and Multimedia Minister Fahmi Fadzil announced a key development: the commissioning of a second 5G network, once the first network – Digital National Bhd (DNB) – achieves 80% population coverage.

The Malaysian Reserve quotes Jearajasingam as saying this shift towards a DWN model could affect valuations based on discounted cash flow models, However, the removal of DNB as a competitor and enhanced control for mobile network operators should mitigate the impact of higher capital expenses on cash flows. Jearajasingam advocates adjustments to earnings models to accommodate the upcoming DWN model.

Industry mostly backs DWN model

Despite these changes being in the preliminary stage, Jearajasingam notes that industry players are largely in favor of the DWN model. The government’s National Digital Network program, intended to bolster 4G networks, is poised to ensure coverage for all. Jearajasingam expects that increased capital requirements might slow dividend growth, but foresees steady dividend levels for Maxis and CelcomDigi in FY23-FY24.

Jearajasingam’s report also addresses the importance of finalizing wholesale pricing negotiations with access seekers. He anticipates lower wholesale prices to boost both retail and wholesale demand for Telekom Malaysia (TM), maintaining steady revenue levels in FY23F. He demonstrates preference for fixed operators like TM over mobile operators, and favors CelcomDigi within the mobile space.

Telco re-valuations likely

Given TM’s conservative valuation and the potential for modest reductions in wholesale prices, Jearajasingam suggests TM may undergo a value re-evaluation compared to currently higher-valued listed MNOs.

Despite potential short-term earnings volatility due to the integration of CelcomDigi and merger-related costs, Jearajasingam underscores the considerable benefits of their merger. He predicts sector-leading earnings growth for FY22-FY25F, with early signs of benefits appearing in 2H23F through lower underlying costs.

Jearajasingam asserts that regulations are the primary drivers of risks and opportunities in the Malaysian telecoms sector. As the sector gains more clarity, it is expected to witness expansion plans and valuation reassessment – a renaissance driven by finalizing 5G plans and wholesale pricing negotiations.

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