Investment Highlights

• We resume coverage on DiGi.com (DiGi) with a HOLD recommendation and DCF-derived fair value (FV) of RM4.40/share (WACC: 7.4% & terminal growth: 2%). This implies 11x EV/EBITDA, slightly below its 2-year average of 12x to reflect the downside risk of near-term higher-thanexpected integration costs and service disruptions during the network integration exercise. Our FV also reflects a 3% premium attributed to its 4-star ESG rating.

• Exceeding expectation, DiGi’s FY22 normalised PATAMI of RM1,203mil were 20% above consensus’ estimate. The 8% jump in the group’s earnings was backed by stronger revenue of RM6,773mil (+7% YoY) following the consolidation of a 1- month contribution from Celcom as well as the healthy underlying performance of the Digi brand.

• Excluding Celcom’s 1-month consolidation, the group’s core earnings were flattish at RM1,122mil (-2% YoY), 12% above street’s estimates, in tandem with a revenue of RM6,224mil (- 2% YoY).

• Similarly, a 52% sequential growth of 4QFY22 earnings is attributed to the addition of Celcom. Excluding Celcom’s contribution, the earnings were flat QoQ at RM287mil.

• Operationally, Digi brand’s (excluding Celcom) consumer subscribers rose 278K QoQ with all 3 segments ie. postpaid (+69K), prepaid (+203K), and home/fibre (5K) reporting positive growth. Meanwhile, blended ARPU remains resilient at RM41/month (+RM1/month QoQ).

• Post-merger, leveraging on its core mobile business, the group plans to drive future growth through fibre and enterprise segments while at the same time, invest in synergistic platforms for both brands.

• In the near-term, DiGi will continue to run on the 2-brand model with each focusing on its key target consumer segment. With the completion of the merger, the group estimates net NPV synergies of RM8bil (network: RM5.5bil, IT: RM1.1bil and others: RM1.4bil) with a significant portion to materialise through network consolidation and optimisation as well as other opex and capex savings.

• Nevertheless, the network integration exercise may pose a risk of constant service disruptions, which may lead to high subscriber churn rate. Near-term earnings also may be capped by near-term integration costs, while the positive synergy impact may not be immediate.

• We believe the current valuation of 10.6x EV/EBITDA (12% discount to 2-year average) is justifiable, reflecting the nearterm risks posed by potential frequent service disruptions while expected synergies could take longer or may not be able to materialise.

Source: AmInvest Research - 27 Feb 2023