Investment Highlights

• We maintain HOLD on CelcomDigi (CDB) with an unchanged DCF-derived fair value (FV) of RM4.40/share (WACC: 7.4% & terminal growth: 2%).

• Our fair value reflects a 3% premium for the group’s 4-star ESG rating and implies an EV/EBITDA of 11x, which is slightly below the 2-year average of 12x. The discount reflects the risk of higher-than-expected network costs and service disruptions in the post-merger integration exercise. We have made no changes to our earnings forecasts.

• We made no changes to our earnings forecast.

• CDB organised a MY5G conference yesterday together with its partners such as SK Telecom, Microsoft, Ericsson, ZTE Corporation, Amazon Web Services (AWS) and Huawei. The event showcased 5G-enabled solutions in various industries and promoted awareness on the application and adoption of 5G technologies.

• The highlight of the showcase is the application of 5G network, which allows for larger data transmission at a faster speed and low latency coming from high-definition video feeds used in various technologies. These technologies include surveillance cameras, automated guided vehicle (AGV) and unmanned aerial vehicle (UAV) employed in factories, plantations and ports.

• The digitalisation of business enabled by 5G connectivity will help improve efficiencies, productivity, and employee safety and subsequently, reduce labour cost.

• We view all these positively for potentially a higher contribution from enterprise segment. We expect revenue growth of 11.0% for CDB’s enterprise segment in FY23F.

• CDB is the only local player to partner SK Telecom. CDB is expected to leverage the partnership by replicating SK Telecom’s business model, not only to provide 5G connectivity but also to explore software solutions for virtual reality (VR), multi-edge computing and technology solutions. By creating a more comprehensive domestic digital ecosystem, CDB would be able to transition from being only a telecommunication company to a telecommunication and technology company.

• Cyber security is a crucial component in the development and adoption of 5G connectivity. Recall that the government has allocated RM60mil in Budget 2024 to implement the 5G Cyber Security Testing Framework and 5G Technology Local Expertise programme. These will help counter rising cyber threats, especially data theft. We believe that the adoption of CDB’s 5G services among SMEs will grow as cyber security improves.

• CDB is currently trading at 10.6x EV/EBITDA below the the 2-year average of 12x. We believe that the discount is justified due to near-term risks resulting from higher-than-anticipated integration costs. Synergies between Celcom and Digi may take longer-than-expected to materialise.

Source: AmInvest Research - 26 Oct 2023