Telcos face cautious outlook as 5G risks remain

PETALING JAYA: The outlook for Malaysia’s telecommunications sector remains neutral, with regulatory developments surrounding the 5G dual network model continuing to weigh on mobile network operators (MNOs), according to Kenanga Research.

The research house said the upcoming equity accounting of Digital Nasional Bhd’s (DNB) financials by its MNO shareholders in the fourth quarter of financial year 2026 (4Q26) would be a key milestone for the sector, potentially providing greater clarity on the operators’ earnings and dividend outlook.

“Against this backdrop, we maintain our ‘neutral’ view on the sector,” Kenanga Research said, while maintaining an “outperform” call on CelcomDigi Bhd with a target price (TP) of RM3.28 and a “market perform” on Maxis Bhd with a TP of RM3.70.

Kenanga Research sees CelcomDigi as its preferred MNO play, citing its more attractive and asymmetric risk-reward profile.

At its current share price of RM2.72, CelcomDigi trades at 21.3 times its financial year 2027 (FY27) forecast earnings, or about two standard deviations below its historical average of 26.2 times.

The research house sees a 37% upside for CelcomDigi under its bull-case scenario, compared with 26% downside in its bear case. For Maxis, the corresponding upside and downside are 21% and 20%, respectively.

Kenanga Research said CelcomDigi also has room for an earnings re-rating as its post-merger cost savings have yet to be fully reflected in forecasts.

It expects CelcomDigi to reach steady-state post-merger cost savings of RM800mil annually by FY27, potentially expanding its earnings before interest and tax margin by five to six percentage points from pre-merger levels.

“More importantly, neither consensus nor our forecasts currently fully reflect these targeted savings,” the research house said, adding that faster-than-expected progress could trigger upward earnings revisions and support a valuation re-rating.

In contrast, Maxis is considered fairly valued after delivering stronger earnings. Its shares were trading at 18.1 times Kenanga’s FY27 forecast earnings, close to its historical mean of 19.7 times.

While its earnings resilience provides greater confidence, Kenanga Research believes this is already largely reflected in the share price, leaving a “tight margin for error.”

A major focus remains DNB’s financial position. Following privatisation, CelcomDigi, Maxis and YTL Power International Bhd are expected to have an equity-account for their respective 33.3% stakes in DNB.

Kenanga Research assumes DNB’s net loss will narrow from RM1.2bil in FY24 to RM750mil in FY25 to FY26 and RM500mil in FY27, translating into an estimated 8% earnings impact on both MNOs in FY27.

Another concern is the possibility of further shareholder funding.

Each MNO has committed about RM880mil to DNB to date, excluding the nominal cost of acquiring U Mobile’s former stake.

However, Kenanga Research believes their balance sheets can absorb additional funding without materially impairing dividends.

“The bigger risk, in our view, would be if shareholder funding becomes a long-term recurring commitment, persisting until DNB reaches sustainable cash-flow breakeven,” it said.

Meanwhile, an analyst expects some DNB-related earnings pressure to be mitigated from 2027 as Maxis and CelcomDigi could rent network elements to DNB, while their own capital expenditure requirements may fall.