Investment Highlights

• We maintain HOLD on CelcomDigi (CDB) with a higher DCFderived fair value (FV) of RM4.80/share vs RM4.40/share previously (WACC: 7.4% & terminal growth: 2%). This reflects a 3% premium for the group’s 4-star ESG rating and implies an FY24F EV/EBITDA of 10.2x, which is 1 standard deviation below its 2-year average of 12x. The discount reflects the risk of higher-than-expected network costs and service disruptions amid post-merger integration exercises.

• We increase our FY23F-25F earnings by 9% to account for a higher growth in subscriber base and cost savings from synergies between Celcom and Digi.

• CDB’s 9MFY23 core net profit (CNP) of RM1,636mil was above expectations as it accounted for 82% of our earlier forecast and 97% of street’s. The results exceeded our forecast due to lower-than-expected depreciation and operating expenses.

• CDB has declared a 3rd interim dividend of 3.3 sen per share, bringing YTD gross DPS to 9.7 sen (+7% YoY). This represents 69% of our unchanged FY23F DPS of 14 sen and translates to a dividend payout ratio of 70%.

• On YoY basis, 9MFY23 CNP increased by 68% from strong growth in prepaid (+1%) and fibre (+28%) as the expansion in subscriber base more than cushioned declines in postpaid (- 1%) and wholesale (-3%). The wholesale segment was impacted by lower contributions from partners while the postpaid segment was affected by a drop in interconnection rate and slower traction for on-demand offerings.

• On sequential basis, CNP increased by 14% from RM523mil in 2QFY23 to RM595mil in 3QFY23, supported by higher service revenue. There was also a 10% QoQ decline in operating cost in 3QFY23 due to savings in operation and maintenance cost (-24%), and USP fund and license fees (-25%).

• 9MFY23 gross synergy savings reached RM98mil, which translates to 49% of CDB’s FY23F target of RM200mil. Synergies between Celcom and Digi resulted in opex savings, mainly in rental/utility, harmonising of licenses/contracts and savings in procurement with better rate in negotiations with vendors. We expect gross synergy savings to ramp up in 4QFY23.

• Looking ahead into 4QFY23, we believe that postpaid revenue will bounce back, supported by high take up rates for new iPhone products. The diverse tier-price product offerings are expected to attract postpaid customers.

• CDB’s net subscribers rose 636K (+3%) YoY in 9MFY23 as all segments experienced growth including postpaid (+212K), prepaid (+398K) and fibre (+35K). The 3.2% YoY increase in postpaid subscribers in 9MFY23 was driven by the bundling of family packages, which offered lower prices compared to principal line. This resulted in a 6% YoY decrease in postpaid ARPU from RM71 to RM67.

• CDB is currently trading at a 10.2x EV/EBITDA, 18% below its 2-year average of 12x. We believe that the discount is justified due to near-term risks resulting from higher-than-anticipated integration costs as synergies between Celcom and Digi may take longer than expected to materialise.

Source: AmInvest Research - 20 Nov 2023