KUALA LUMPUR (Nov 4): It is a surprise to many analysts that U Mobile Sdn Bhd, instead of CelcomDigi Bhd  (KL:CDB) or Maxis Bhd (KL:MAXIS), won the bid to operate a second 5G network.

This is simply because U Mobile is relatively smaller than its rivals Maxis and CelcomDigi in terms of subscriber base and financial strength. And that leads to expectation that U Mobile will need a financially strong partner to come on board. 

CIMB Securities commented in its research note that it makes commercial sense for U Mobile to collaborate with Maxis or CelcomDigi to share the rollout expenses for the second 5G network, given U Mobile’s higher net debt-to-earnings before interest tax, depreciation and amortisation ratio at 4.3 times, compared to Maxis’ (2.2 times) and CelcomDigi’s (2.1 times).  

The cost-sharing will be vital for U Mobile. CIMB Securities estimates RM2 billion to RM3 billion in investment is required over 18–24 months to roll out to 80% of 5G population coverage and RM1 billion a year subsequently, which is higher than U Mobile’s average capitalised capex of RM500 million per annum between FY2014 to FY2023, it added.

CIMB Securities shares the consensus view that the Malaysian Communications and Multimedia Commission’s (MCMC) decision was unexpected, noting that Maxis and CelcomDigi were widely expected to win the second 5G network licence.

CIMB Securities foresees a potential knee-jerk sell-off in Maxis and CelcomDigi shares, as investors weigh the implications of U Mobile controlling the second 5G network, and the cost and network-quality impacts on telcos remaining with Digital Nasional Bhd (DNB).

However, the news did not spark heavy selldown on the two public-listed telcos in the morning session on Monday. At noon break, Maxis’ share price gained two sen to RM3.63, valuing the telco at a market capitalisation of RM28.4 billion. The stock has fallen from this year’s peak of RM4 in mid-September. It has dropped 22 sen or 5.71% year-to-date. Meanwhile, CelcomDigi fell one sen to RM3.36, giving it a market capitalisation of RM39.4 billion. It has been on a downward trend since April. The counter retreated from this year’s high of RM4.33 in March, and has shed 17.7% or 72 sen year-to-date. 

CIMB Securities sees an accumulation opportunity for Maxis and CelcomDigi shares, in the event of any sharp sell-off. The research house currently has retained its “overweight” rating on the sector, with CelcomDigi and Maxis as its top picks, given that the stocks are trading at a discount compared to their historical five-year means.

Kenanga Research, which is also surprised with MCMC’s decision, highlighted that further clarifications are needed to clear the ongoing uncertainties, such as the telco partnership with U Mobile to develop the second 5G network, DNB’s ownership structure, coverage and timeline goals for the second 5G network, as well as financial and operational health of the first 5G network operators.

Hence, Kenanga Research said it continues to favour fixed-line operators like Telekom Malaysia Bhd (KL:TM), which are less exposed to these uncertainties. Overall, the research firm has maintained an “overweight” stance on the sector.

On the positive side, as neither CelcomDigi nor Maxis will lead, the research firm expects muted commitments in terms of capex and resources associated with building a new network. However, Kenanga pointed out that this is dependent on the specific stake the mobile network operators will hold in the second 5G network, and their levels of involvement.

TA Securities has a more optimistic outlook, upgrading the telecommunications sector to “overweight” in light of the move. The firm sees this latest development as having ended the prolonged uncertainty following the government’s shift from a single wholesale network, to a dual wholesale network model in May 2023.

“This will help clear up the uncertainty in the sector, that has weighed on investor sentiment,” said TA Securities.  

“Although we expect some knee-jerk reactions to the share prices of the losing telcos, we believe that investors should take this opportunity to bottom-fish, as the uncertainty surrounding the implementation of the second 5G network has now been cleared. Therefore, we upgraded the sector call from ‘neutral’ to ‘overweight’,” said TA Securities in a note.  

This latest development could signal U Mobile’s exit from DNB. Meanwhile, the existing shareholders of DNB can now fully focus on implementing cost optimisation initiatives at DNB, said TA Securities.

Currently, U Mobile and three other mobile network operators — CelcomDigi, Maxis and YTL Communication Sdn Bhd — each hold a 16.3% stake in DNB. The Ministry of Finance holds the bulk, or 34.88% stake in DNB.

BIMB Securities highlighted that this announcement will see U Mobile solidifying its role in Malaysia’s telco landscape, paving the way for a successful initial public offering (IPO) listing ahead.

U Mobile will ride on its planned IPO listing as an avenue to raise funds necessary for the network rollout. Subsequently, this will help it to reduce foreign shareholding to below 20% as per requirement by the MCMC, said BIMB Securities.

The research house expects U Mobile and its anticipated partners to prioritise 5G network development in urban areas, while DNB focuses on expanding coverage into rural regions.

BIMB Securities maintains an “overweight” rating on the telco sector, driven by the expected clarity in 5G network structure, and attractive 5G bundling packages, increased investment in data centres and 5G adoption rate, alongside recovery in roaming revenue, which will be helped by the increased usage from migrant workers and tourists.