Following completion of the Celcom and Digi merger on 30 November 2022, the current 4QFY22 quarter has reflected a 1-month impact from Celcom. Digi.Com (which may be rebranded to CelcomDigi later) posted a 4QFY22 net profit of RM42.8m. After adjusting for non-recurring and merger-related costs, normalised net profit stood at RM368m. For FY22, normalised net profit was at RM1,202.8m, increasing by 5.2% YoY due to the incorporation of Celcom. Post-merger, total customer base strengthened to 20.3m (from 11m prior to merger), making it the largest telco operator in Malaysia. We introduce our new earnings forecasts for the merged entity, which have also taken into account the effect of 5G wholesale cost. Nevertheless, our forecasts are still subject to further adjustment pending the finalization of the country’s 5G rollout plan. For now, we value Digi based on 9x EV/EBITDA to derive our TP of RM3.80. Maintain Neutral on Digi. A fourth interim dividend of 3.1sen per share was declared, bringing the total DPS for FY22 to 12.2sen (FY21: 14.9sen).

• FY22 revenue rose 6.9% YoY, after incorporating revenue contribution from Celcom. Post-merger, the split between prepaid and postpaid revenue is more balanced at 48% and 50% of service revenue. In terms of subscriber base, prepaid accounted for the bulk of customer base at 67% while the remaining 33% was postpaid. Blended ARPU remained largely unchanged at RM41. Excluding Celcom’s 1-month contribution, the full-year service revenue contracted by 1.1% due to lower prepaid revenue following the conclusion of Jaringan Prihatin as well as inflationary pressures affecting consumer spending.

• Headline net profit of RM764m was impacted by additional depreciation and finance costs resulting from the harmonization of accounting treatment and merger-related costs, as well as Cukai Makmur. The merger has also resulted in higher operating costs namely staff cost, operations & maintenance cost and USP fund & license fees.

• What to expect after the merger? Telenor and Axiata now hold equal ownership of Digi at 33.1% each. Operationally, we do not expect any major impact in the immediate term with management focusing mainly on the integration phase. In the longer run, we believe there are synergies to be reaped in terms of sharing of resources, network optimization and lower procurement cost due to better scale in purchases. The group is still committed to its previously-announced synergy target of RM8bn (bulk of this to be realized in the next 2-3 years).

Source: PublicInvest Research - 27 Feb 2023