Investment Highlights

• We maintain our HOLD recommendation on Digi.Com with unchanged forecasts and DCF-based fair value of RM4.05/share, which reflects a premium of 3% given its 4-star ESG rating. Our DCF is derived from a WACC of 6.3% and terminal growth rate of 2%, implying an FY20F EV/EBITDA of 12x — in line with its 2-year average together with a supportive dividend yield of 4%.

• Digi’s share price rose 71 sen or 19% on Friday after the announcement by Axiata and Telenor that they are in advanced discussions to merge the telco operations of Celcom Axiata (Celcom) and Digi.Com.

• As highlighted in our Sector Report on 9 April, we understand that this could involve Digi acquiring Axiata's wholly-owned Celcom via a share swap together with a cash equalisation sum of RM2bil, of which RM1.7bil will come from new Digi debt and RM300mil from Telenor. Both Axiata and Telenor will have equal stakes of 33.1% each in the merged entity which will be called Celcom Digi, with the balance held by Digi's minority shareholders.

• Celcom Digi will emerge as the leading telecommunications service provider in Malaysia in terms of market capitalisation, revenue and profit, with proforma FY20 revenue of RM12.4bil, pre-synergy EBITDA of RM5.7bil and 19mil customers, 71% above Maxis, the current market leader.

• Assuming no synergies or cost reduction have been achieved, we estimate that the current share price implies a merged FY22F EV/EBITDA of 10x, which is 2 percentage points lower than Digi’s 12x over the past 3 years due to the much lower valuation attributed to Celcom as Axiata Group currently trades at only 4x.

• If the merger is successful with Celcom Digi achieving a reduction in FY22F operating costs by 10%, we estimate that the merged entity’s fair value could reach RM5.06–RM6.21/share, pegged to an FY22F EV/EBITDA of 10x–12x and an ESG premium of 3%. This represents a further upside potential of 13%–39%.

• As there is no certainty in the current negotiations, as highlighted by the parties, we have not adjusted our fair value pending the completion of a formal agreement. Hence, if the deal is unsuccessful, the share price could revert to our current fair value of RM4.05/share.

• However, we have provided a sensitivity analysis of the probable range of fair values based on different EV/EBITDA assumptions in Exhibit 1. At this stage, amid declining EBITDA and higher capex expectations against the backdrop of 5G rollout programmes, the stock currently trades at a fair FY21F EV/EBITDA of 12x – at parity to its 2-year average with decent dividend yields of 4%.

Source: AmInvest Research - 12 Apr 2021