KUALA LUMPUR: There could be numerous downside risks to mobile network operators' near- and medium-term profitability should the government proceed to adopt a single wholesale network model for the 5G network rollout, says Kenanga Research.

       This comes as the research firm said it expects the government to opt for the SWN model given that cancellation would pose "severe risks and repercussions to the sector, government and nation".

       In a report, it said it shares Digital Nasional Bhd's view that the premature termination of the SWN could bring about early termination payments, adversely impact on FDI inflow into Malaysia due to a loss of confidence, delay the 5G network rollout, and widen the urban-rural digital divide.

       "Furthermore, in DNB's view, a DWN would spell the end of DNB's wholesale network, likely due to wholesale competition, which would in turn, turn the once-secondary telco-led wholesale network into a private SWN monopoly," it added.

       However, Kenanga noted that the single wholesale network could negatively impact the telcos' profitability.

       Outlining the downsides, it said the telcos could have limited room to raise average revenue per user (Arpu) on 5G services as they will face stiff competition and toe the government's line to provide affordable 5G mobile services.

       It added that a slow adoption in 5G handsets and networks as well as price competition from smallers operators could lead to slow earnings from 5G services, while the telcos will have to pay upfront wholesale fees.

       Meanwhile, there is a risk of accelerated depreciation and amortisation on existing assets, such as existing spectrum, if they cannot be repurposed for 5G or if their useful life is shortened in light of the SWN approach.

       Concomitantly, there will be continued capex on 4G networks as telcos meet the growing 4G traffic and Jendela initiatives to bridge the rural-urban digital divide.`

       Kenanga maintained its "neutral" view on the telco sector as it had largely factored in the downside risks into its lower valuations.

       "However, that said, should these risks turn out to be worse-than-expected, that poses further estimates/valuation downside risks to the domestic-only MNOs, namely Digi and Maxis, and to a limited extent Axiata.

       "Key upside risks to our call include earlier-than-expected ownership stake transfer of SWN to MNOs, and the cancellation of SWN, both of which we think are highly unlikely," it added.