CelcomDigi Bhd (CDB) reported a 1QFY23 net profit of RM317.9m, which  incorporated a full quarter of Celcom’s results. After stripping out non-operating items, core net profit was broadly within expectations. For a  meaningful comparison, assuming the Celcom merger was completed on 1  January 2022 and merger transaction cost was excluded (Table 2), 1QFY23  profit after tax was down 35.7% YoY due to accelerated depreciation from  revision in asset useful life and sites rationalization. We cut our FY23-25F  earnings forecasts by 8-12% as we factor in higher depreciation cost. We  value CDB based on 9x EV/EBITDA to derive our TP of RM3.80. Maintain  Neutral. A first interim dividend of 3.2sen per share was declared (1QFY22:  2.9sen).

• Based on a comparable analysis, 1QFY23 revenue rose 4.3% YoY.  This was mainly due to higher device sales of newly launched  smartphone models as well as higher subscriber base which grew 3%  on a stable blended ARPU of RM42. Service revenue improved  marginally by ~1% YoY as the increase in contribution from prepaid,  postpaid and home fibre business was partially offset by lower revenue  from wholesale & others.

• 1QFY23 profit after tax was 35.7% lower, impacted by accelerated  depreciation from revision in asset useful life and sites rationalization.  Total cost was also higher (+5% YoY) in line with the higher device  sales whilst operating expenses were lower from a more prudent cost  management.

• Outlook. Following the annoucement of the formation of a second 5G  network provider as early as next year, CDB terminated its share  subscription agreement with Digital Nasional Bhd (DNB). This is  understandable as CDB, being the largest telco in the country, should  be keen to play a more direct and active role in 5G rollout. We believe  it is likely to be appointed the second 5G operator after DNB.  Meanwhile, post-merger, we note that there are synergies to be reaped  in terms of sharing of resources, network optimization and better  economies of scale that could amount to RM8bn over the next 3-3.5  years. However, an estimated integration cost of ~RM200m is expected  to be incurred in FY23F.

Source: PublicInvest Research - 25 May 2023