• Digi to greatly benefit from the influx of tourist next year

• We increase our valuation on Digi as we are bullish on the  Celcom-Digi merger that is expected to be completed by yearend

• Celcom-Digi merger will maximise shareholder returns and  therefore, the synergistically effects.

• We value Digi at RM4.92 (from RM3.89 previously) and hence,  our BUY call on the stock.

Earnings will be supported by a gradual recovery in roaming  business given the expected influx of migrant workers and the  number of tourists next year, a boon for prepaid segment

We understand that Digi’s core is connectivity and the group is  dedicated to continue its transformational journey in order to meet  customer demands with its services where they have a right to play.  In the current quarter, Digi’s prepaid revenue has declined by 7% YoY  as the migrant segment is still in the recovery mode. However, we  think this is temporary and the revenue for this segment will  rebound, supported by 15mn tourist arrivals expected next year, a  multi-fold jump compared to 4-5mn in 2022. This will be further  boosted by the government’s resolve to source migrant workers from  16 countries in order to address the labour shortage and therefore,  demand for Digi’s prepaid.

Celcom-Digi merger a step away from completion.

The management has guided that the merger deal will be completed by end of this year. The merger of the two companies could lead to a  combined RM40.0b in market capitalization which will position  Celcom Digi as the leading player in the telecommunication sector. Hence the deal will benefit both groups in term of combined talent &  technology, cost reduction as well as higher profit margin. All in all, we are positive on the merger in view of maximise shareholder  returns which could generate valuable business synergy given both  entities long-standing experience in the Malaysian telco landscape.

Maintain BUY with higher TP RM4.92

Note that we revised up Digi PATAMI by 6.4% and 6.3% to  RM1,188mn and RM1,241mn in FY23F and FY24F after taking into  account the higher-than-expected number of tourist next year. This  will give a huge benefit to Digi as the telco player that is leading in  the prepaid business. On top of that, we also increase our valuation  on Digi as the company is expected to garner and command a  premium in its value given their potential on 1) 5G particularly with  solid Telenor involvement in the company 2) their strength-to-strength in prepaid business particularly with the huge influx of  migrant workers and number of tourists next year. We reiterate BUY call on Digi with a higher DCF-derived TP of RM4.92 (from RM3.89)  following our earnings upgrade and revision in valuation. Our  valuation is derived based on DCF valuation with a WACC of 5.0%  and a long-term growth of 1.6%. We believe that the group’s  bottom-line will be driven by (i) a gradual recovery in roaming  contribution amid multi fold increase in the number of tourists in  2023 onwards in-line with the reopening of international borders, (ii)  a resilient EBITDA margin of 47%, above its peers average of 44.7%,  (iii) a sanguine outlook for the B2B segment propelled among others  by the reacceleration of economic activities globally, (iv) Telenor's  (global leader in 5G) steady hand in Digi 5G's strategy and (v) a spin  off from its potential merger with Celcom which will push the new  entity to become a leading telco with the largest customers base and  market capitalisation.

Source: BIMB Securities Research - 8 Nov 2022