KUALA LUMPUR: The award of the second 5G network to U Mobile Sdn Bhd, is a surprise to the market, given bids by two of the largest mobile network operators (MNO) in the country, Maxis Bhd and CelcomDigi Bhd (CDB).
CIMB Securities in its note today said the Malaysian Communications and Multimedia Commission's (MCMC) decision came as a surprise to the firm and the market.
"Maxis or CDB (to a lesser degree) were widely expected to win, being the two largest MNOs in Malaysia (in terms of subscribers and earnings, with relatively stronger balance sheets)," it said.
CIMB Securities expects Maxis' and CDB's share prices to see a negative knee-jerk reaction today as investors may worry about the implications of U Mobile controlling the second 5G network and whether telcos left back at Digital Nasional Berhad (DNB) will be disadvantaged in terms of cost and network quality.
However, it believes any sharp sell-off in Maxis' and CDB's shares is an opportunity to accumulate.
"We think it makes commercial sense for U Mobile to collaborate with Maxis or CDB to share the rollout cost for the second 5G network," it added.
As at end-FY23, U Mobile's net debt/earnings before interest tax depreciation and amortisation (ebitda) was relatively stretched at 4.3 times (Maxis: 2.2 times, CDB: 2.1 times).
CIMB Securities projects that RM2 billion-3 billion in investment is required over the next 18-24 months and RM1 billion per annum thereafter to roll out to 80 per cent 5G population coverage, which is relatively big versus U Mobile's average FY14-23 capitalised capex of about RM500 million per annum.
The firm said U Mobile may offer an equity stake in Entity B or charge 5G wholesale fees as another form of cost sharing, on terms that are deemed unattractive to Maxis and/or CDB.
However, the research firm said this risk is somewhat mitigated by the fact that there will be a limit to how unfavourable the terms can be before Maxis or CDB opt to stay put in Digital Nasional Bhd (DNB).
"Although it is not ideal to have half of the 5G bandwidth (100 MHz at 3.5 GHz, 40 MHz at 700 MHz) supporting four mobile network operators (MNOs), DNB can make up for its limited spectrum via cell densification (in medium- to higher-traffic areas), with the investment to be shared among its telco shareholders. "We also think there is room for DNB to rationalise cost (corporate cost, infrastructure leasing) to narrow the cost differential to Entity B," it said in a research note. Meanwhile, U Mobile's foreign shareholder Singapore's Straits Mobile Investments sale of a 28.3 per cent stake could form part of the secondary offering in a potential U Mobile initial public offering (IPO), although the possibility of a direct sale of the shares to another telco cannot be ruled out.
U Mobile will reduce its foreign majority shareholding to 20 per cent from current 48.3 per cent to ensure greater Malaysian control.
For the sector, CIMB Securities said this marks the end of the single wholesale network saga and the transition to a dual network model.
"We believe the remaining uncertainties pertaining to the final shareholding structure of DNB and Entity B will be resolved in the next three to six months, ahead of the second 5G network rollout. "We expect the Finance Ministry (MOF) and exiting telcos to sell their stakes in DNB to telcos that stay on, with DNB redeeming MOF's special share 24 months after that. DNB and Entity B will function as network-sharing vehicles that are fully commercially run and owned by the telcos," it said.