Maintain HOLD on CelcomDigi (CDB) with an unchanged DCF-derived fair value (FV) of RM4.40/share (WACC: 7.4% & terminal growth: 2%). This implies an 11x EV/EBITDA, slightly below its 2-year average of 12x to reflect the downside risk of near-term higher-than-expected integration costs and service disruptions during network integration exercise. Our FV also reflects a 3% premium attributed to its 4-star ESG rating.
We made no changes in our forecasts as CDB’s 1QFY23 results were largely in line with our expectation but above consensus. The normalised PATAMI of RM579mil accounts for 29% of the full-year estimate and 34% of consensus. We exclude RM258mil accelerated depreciation charges from revision of the group’s assets useful life and site rationalisation for our normalised earnings calculation.
The 16% jump in the group’s earnings was backed by stronger revenue of RM3,180mil (+4% YoY). The service revenue grew 1% with all segments recording an improvement ie. postpaid (+1% YoY), prepaid (+2% YoY), home fibre (+27% YoY), except for wholesale & others (-7% YoY).
The sequential 1% drop in revenue was mainly attributed to high base effect in 4QFY22 following seasonally higher usage due to year-end festivities. All segments reported lower sales QoQ, except for the home fibre unit.
Operationally, the group’s total subscribers grew 206K QoQ driven by postpaid (+1.6x) and prepaid (+52%) segments. The spike up in postpaid subscriber base was boosted by higher take-ups in bundle offerings. The group’s blended average revenue per user sustained at RM42/month level, flattish QoQ and YoY.
CDB also shared expectations to realise a gross synergy of RM200mil-RM250mil and incur an integration cost of RM200mil in FY23F. This will be a part of the group’s net NPV synergy target of RM8bil from the Celcom-Digi merger.
Leveraging on its core mobile business, the group plans to drive future growth through fibre and enterprise segments while at the same time investing in synergistic platforms for both brands.
Nevertheless, the network integration exercise may pose a risk of constant service disruptions, which may lead to high subscriber churn rate. Prospective 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 10.7x EV/EBITDA (12% discount to 2-year average) is justifiable, reflecting nearterm risks posed by potential frequent service disruptions while expected synergies could take longer or may not be able to materialise completely.
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