No clear winner in 5G dual wholesale network model, opines analysts
KUCHING: There is no clear winner in the impending 5G dual wholesale network model (DWN) as both networks, entity A and entity B, are ‘double edged swords’ with their own respective pros and cons says analysts at Kenanga Investment Bank Bhd.
To recap, it was previously announced that after Digital Nasional Bhd (DNB), the owner of the current 5G single wholesale network (SWN), manages to meet 80 per cent of coverage of populated area (CoPA) by the end of 2023, we will begin transition to a DWN.
As part of the transition, entity A and B will be established who will own a fully privatised DNB and the second 5G network (NW2), respectively. Both entities will be entirely owned by private telcos though specific equity stakes have yet to be announced.
In a sector update, the research arm guided that assuming no major outlay for stake acquisitions in both entities; they believe the pros and cons for both entities are fairly equal.
For entity B, they believe its advantage will lie in better control over costs and timing of network roll-out due to its autonomy in selecting its key technology provider, suppliers and vendors.
The research arm pointed out that this increased autonomy may result in a better cost structure that allows for higher asset returns. Additionally, NW2’s roll-out may also be optimised via integration with entity B’s existing core network and towers.
“Therefore, this corresponds to greater cost synergies and higher service quality. However, on the flipside, B needs to allocate substantial resources, especially manpower and fundraising efforts, to roll out a new network,” they added.
On the flipside, entity A is not a clear winner despite being able to enjoy immediate cash flow accretion from access payments on the existing NW1.
This is because its legacy cost structure and fixed design may turn out to be a setback and diminish its competitive edge in securing offtake from price sensitive access seekers.
“Recall that regulated tariffs offered by entity B cannot exceed that of NW1. Hence, if given a more efficient cost structure, B may potentially offer lower rates and snag wholesale market share from A,” the research arm explained.
For the best-case scenario for entity A, Kenanga Research opines that should the group’s associate contribution more than offset costs from wholesale network access payments and costs arising from the required outlay for stake acquisition, the entity will end up enjoy a leaner balance sheet, a boost to its earnings, and an absence of profit drag from depreciation of tis 5G spectrum fees, network and interest costs.
“Correspondingly, this implies enhanced capacity to leverage and potentially afford higher dividends. These same benefits could also apply to Entity B post completion of NW2,” the research arm said.
Conversely, the worst case scenario for entity A is if the group sees a significant associate loss from DNB, chunky 5G access payment drag on profit margin and a substantial cash outlay to secure a stake in DNB, they might see a contraction in their profit and cash flows and an evaporation of their dividends.
While details on the dual network model are still scant at the moment, the research arm reckons that it is likely that the Ministry of Communication and Digital (KKD) will likely push for each 5G networks (Entity A and B) to be spearheaded by a single major telco leading a consortium of other smaller players.
They add that they also do not discount the possibility that Digital Nasional Bhd (DNB), which will go private and become entity A, will undergo a shareholding recalibration to ensure that both entity’s subscribers bases are comparable.
“Additionally, we believe that operating conditions need to be level – which implies equal ownership of 5G spectrum blocks between A & B. On the same note of achieving fairness, we believe that KKD may structure a financially reasonable exit mechanism from DNB for entity B members,” they added.
And on the concerns of irrational retail competition once the dual network model drops, Kenanga Research says that these concerns along with earnings uncertainty have mostly softened after revised tariffs for wholesale and retail services were unveiled.
Kenanga Research forecasts that MoF and KKD will issue the official 5G DWN policy directive by the first quarter of 2024 (1Q24).