Potential 5G pains for MNOs
? Our in-depth look at DNB’s commercial offer shows that MNOs may have to pay substantial 5G wholesale fees from FY23F onwards.
? This may hit Maxis’s FY23-31F core EPS by 15-33%. We think consensus has yet to factor this in due to lack of information on DNB’s wholesale fees.
? Downgrade sector to Underweight and Maxis to Reduce with revised TP of RM3.80. Our top pick remains TM (T MK, Add, TP: RM7.50).
MNOs may have to pay substantial 5G wholesale fees from FY23F
If the government proceeds with its plan to accelerate the rollout of the 5G single wholesale network (SWN) via Digital Nasional Bhd (DNB; Unlisted), we estimate each mobile network operator (MNO) may be charged substantial minimum wholesale fees of RM303m/403m/432m/432m in FY23F/24F/25F/26F, based on DNB’s commercial offer and timeline for site rollout. For Maxis (MAXIS MK, Reduce, TP: RM3.80), we project this could further rise to RM577m-1.5bn p.a. in FY27-31F, driven by traffic volume growth.
Minimal incremental 5G revenue and sticky 4G capex means…
We believe MNOs may not be able to generate much extra mobile revenue from 5G in the near/mid-term due to a) lack of unique “killer” use cases and b) still limited coverage in the first few years, while c) 5G device penetration will take time to rise. We do see potential for new 5G enterprise revenue streams, but widescale commercialisation may be 3-5 years away. While DNB pays for 5G capex, we think MNOs’ capex will not drop much in FY22-24F due to a) JENDELA’s 4G coverage/speed targets and b) still growing 4G traffic. MNOs’ capex may fall from FY25F as they offload more 4G traffic onto DNB’s 5G network when coverage is wider and 5G device penetration is higher, in our view.
… MNOs’ core EPS could be significantly hit in the SWN scenario
If the above SWN scenario materialises, our FY22F core EPS for Maxis could be lower by 3.6% and by a bigger 15.0-33.4% for FY23-31F. The resulting FY22-23F core EPS would be 10-19% below current Bloomberg consensus estimates. We think this indicates that the market has yet to factor in substantial 5G wholesale fees to DNB due to the lack of information on the rate and fee structure thus far.
More intense mobile competition in the long run is another risk
When DNB’s 5G coverage exceeds 90% in 2027F, we believe smaller MNOs (Webe, Yes) may be able to compete more effectively vs. the Big 4 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 EBITDA margin 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 decline/market share loss.
Downgrade sector to Underweight & Maxis to Reduce
The government may decide on its SWN plan in Feb 2022. However, as the potential earnings downside risk is quite big and MNO share prices have yet to reflect this in a major way, we turn from sector Neutral to Underweight. We also downgrade Maxis from Hold to Reduce with a revised TP of RM3.80 (20% discount applied to its DCF-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 remains our top Malaysian telco pick, with unchanged DCF-based TP of RM7.50. Key upside risks: lower 5G wholesale fees, cancellation of SWN or MNOs offered equity stakes in DNB.