KUALA LUMPUR (May 14): Telecommunications players face rising competition in the coming years as changes in the country’s 5G market could put more pressure on earnings, according to CGS International.

Citing Telekom Malaysia Bhd’s (KL:TM) planned switch to U Mobile’s lower cost network, the research house said stronger competition from U Mobile’s second 5G network rollout could become a greater concern for CelcomDigi Bhd (KL:CDB) and Maxis Bhd (KL:MAXIS) than the effect from equity accounting Digital Nasional Bhd’s (DNB) financials.

Once U Mobile’s 5G network reaches a larger scale, expected around 2028, it may be able to operate at lower costs and at more competitive rates, said CGS International in research note on Thursday.

The research firm said the bigger telco players could resort to aggressive defensive strategies, including the use of mobile virtual network operators (MVNOs), potentially echoing Singapore’s post-2019 experience where similar competition led to weaker profitability for established operators.

“Our analysis of the Singapore mobile market post-2019, points to underlying risks for Malaysian mobile operators, which the market may be ignoring,” said CGS International.

Against this backdrop, CGS International kept its overall view on the telco sector at ‘neutral’, but remains cautious on mobile-focused companies.

Concerns over DNB’s transition to equity accounting from the second half of 2026 have already begun to affect market sentiment, said CGS International, thus contributing to a 6% decline in combined market capitalisation of Maxis and CelcomDigi since end-February as investors began pricing in lower earnings expectations.

CGS International also lowered its financial year 2026 (FY2026) to FY2028 core net profit estimates for both companies, although it expects part of the earnings impact to be mitigated from 2027 onwards through networking leasing income and reduced capital expenditure as DNB assumes a larger share of 5G investment.

On valuations, the research firm said upside for mobile operators may remain constrained despite historically low valuation multiples, given uncertainty over future pricing pressure and market share battles.

Following revised assumptions, CGS International cut its target price (TP) for Maxis to RM3.72 and CelcomDigi to RM3.10, both a 28 sen decrease. It kept its ‘hold’ calls on both stocks.

Telekom Malaysia remains its top pick along with Axiata Group Bhd (KL:AXIATA).

AskEdge data shows Maxis trading at a price-earnings ratio (PER) of 18 times while CelcomDigi’s PER is at 23 multiples. Both are at its lowest compared to its historical valuation in recent years.