TM received a termination notice from Digital Nasional Berhad (DNB) for the Share Subscription Agreement (SSA) signed on 1 Dec 2023. From a positive standpoint, not having equity ownership in either 5G networks could allow TM to allocate more resources to its core fixed connectivity business. We maintain our forecasts, TP of RM7.53 and OUTPERFORM call.

No longer participating in the first 5G network. To recap, DNB entered into an SSA with TM and four other mobile network operators (MNO) - CDB, MAXIS, YTLPOWR and U Mobile. The other four MNOs completed their SSAs on 28 June, securing a collective 65.1% stake in DNB, with each MNO holding a 16.3% share. The Ministry of Finance (MoF) retains a 34.9% stake and a special share in DNB.

TM was given until 21 Jun to meet the conditions precedent and complete the SSA. DNB extended TM’s long stop date to 21 Aug to allow TM time to obtain shareholders’ approval at an EGM (as the SSA was a related party transaction). However, TM requested an additional extension until 31 Dec to resolve EGM-related matters. After deliberating upon this request, DNB was unable to grant a further extension, resulting in termination of the SSA.

Business as usual. TM reiterated that it will continue to offer 5G services, as its wholesale service subscription from DNB remains intact.This aligns with our belief that the RM233m paid by TM upon entering the SSA will now be regarded as prepayment for DNB’s services.

Termination of TM’s SSA raises questions about TM’s ongoing bid to develop the second 5G network. We await clarity from TM at its 2QFY24 results briefing today. The other MNOs, having completed their SSAs, are now eligible to potentially own and operate this network. To recap, TM, CDB. MAXIS and YTLPOWR have submitted their tenders to develop the second network, with the results expected in 3QCY24. In addition, the government's forthcoming announcement on the 5G dual network policy will shed light on the future of 5G in Malaysia.

Two sides to every coin. From a positive standpoint, not having equity ownership in either 5G network could allow TM to allocate more resources to its core fixed connectivity business. In particular, we anticipate significant capex outlay in the near-to-medium term for submarine cables, given the proliferation of data centers (DC) in Johor and upcoming investments by hyperscalers (ie Google, Amazon and Microsoft) in Malaysia.

Furthermore, given TM’s relatively smaller mobile subscriber base, it has less economies of scale to harness versus its peers from investments into its own 5G network.

Forecasts. Maintained.

Valuations. We also keep our TP of RM7.53 based on unchanged 7.0x FY25F EV/EBITDA. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3).

Investment case. We like TM on account of: (i) it being leveraged towards secular data growth on the back of current trends such as digital transformation, proliferation of internet of things (IoT), cloud-based applications powered by generative AI, etc, (ii) it benefitting from JENDELA phase 2 projects via roll-out and monetization opportunities, (iii) earnings accretion from new DC business, and (iv) higher demand for data transmission via its network of digital infrastructure that includes submarine cables and landings as well as fiber optics backhaul. Maintain OUTPERFORM.

Risks to our call include: (i) cost drag from Unifi Mobile due to lack of scale, (ii) pricing pressures at the retail segment arising from policy-led directives, and (iii) irrational competition in the retail fiber broadband space.

Source: Kenanga Research - 26 Aug 2024