• Fixed players still a better bet. Competition remains tight in the mobile segment as consumer purchasing power is weakened by the inflationary environment. In our view, the 5G spectrum award via apparatus assignment (AA) looks to be less punitive vs the spectrum assignment (SA) model where we previously estimated a 5-8% negative earnings impact on Maxis and CelcomDigi (CDB). Still NEUTRAL with a preference for fixed line/integrated plays from structural catalysts and stronger earnings outlook. Top Picks: Axiata Group and OCK Group.

• 5G Application Information Package (AIP) issued on 1 Jul. The regulator has issued the AIP to telcos which contained the guidelines, evaluation criteria, pricing and timeline for the tender (beauty contest) of the 5G spectrum. We learnt that the spectrum will be awarded on an AA basis, to be aligned with the earlier award to Digital Nasional Berhad (DNB). The AA model subjects a recipient to a fixed fee, tagged to the number of sites to be rolled out. This is comparatively less punitive, in our view, vs an upfront fee levied under the SA model, which has been the case with earlier spectrum awards. The Mobile Network Operators (MNOs) will likely be assessed based on a range of factors including coverage, infrastructure sharing, technical and financial considerations, which should be in their business plans. The outcome of the spectrum award will likely be known in 3Q24.

• Most MNOs are keen on Entity B. Maxis, CDB and U Mobile have expressed their desire to roll out the second 5G network. Based on the DNB share agreements inked on 28 Jun, the MNOs are to propose amongst them which will remain in DNB within 30 days. MNOs moving to Entity B are required to divest their stake(s) to DNB’s remaining shareholders via call and put options entered.

• 5G spectrum could cost MY1.4bn upfront on a SA basis. We previously estimated the total outlay for the 5G spectrum (700MHz, 3.5GHz and mmwave) could come up to c.MYR3.2bn. This is based on the AIP issued by the regulator in 2017 and assumes that half of the spectrum assigned to DNB is re-allocated to Entity B with Singapore’s previous reserve prices as the benchmark. Under this scenario, the impact to Maxis’ and CDB’s FY25F-26F core earnings would be -5% to -8%, largely from higher financing cost, annual fee and spectrum amortisation, all else being equal. The impact to their TPs would be -3% to -5%, mainly from higher debt.

• Capex likely to be manageable with collaboration. While telcos have not guided on 5G capex, we do not see a new capex upcycle as they are expected to form network sharing pacts, use existing brownfield sites, and focus on areas with stronger ROIs for the roll out. We see a potential reversal of the previous directive by the regulator disallowing MNOs to re-farm 4G spectrum for 5G as contributing to lower industry capex with the use of dynamic spectrum sharing (DSS). Given the time needed for site roll out, the MNOs will continue the wholesale arrangements with DNB in the medium term. This could portend some downside earnings risks in the medium term, in our view, as telcos bear additional 5G wholesale and opex-related charges to the new 5G network.

• Key risks are competition, weaker-than-expected earnings and regulatory setbacks (Iack of details and transparency).

Source: RHB Securities Research - 16 Jul 2024