■ Reiterate Add on CelcomDigi (CDB) with an increased price target of RM5.18 (RM5.00 previously) as we lift our forecasts.

■ The integration is progressing with merger costs tracking below our earlier estimates. Hence, we lift our FY23/24/25F EBITDA by 4.1%/2.9%/3.1%.

■ We believe profits will double over FY23F-25F, rerating its share price, which is currently trading at <-0.5 s.d. from its post-2010 average adj. EV/EBITDA.

Network and systems integration progressing - limited disruptions

The CelcomDigi network integration appears to be progressing with minimal issues and no evidence of major disruptions, judging by our checks on online telco blogs. As per the company’s disclosures in mid-August, integration for about 40% of the 5,000 sites targeted for 2023 have been completed. Overall, the integration process will see the combined premerger 25k sites of the two networks streamlined to ~18k sites, with network capacity and coverage improved post integration, according to the company. We also note that Celcom’s website has incorporated some of the systems previously only available on DiGi, e.g. allowing customers to pick their preferred numbers when purchasing a new SIM – a positive sign of the back-end integration process. In our view, the merger brings together the network coverage of Celcom and the advanced back-end systems of DiGi to provide customers an improved overall experience.

5G finalisation still months away

Our discussions with industry players suggest that progress is being made on 5G negotiations but finality could still be months away. Our view remains that Celcom and Maxis will be the key drivers of the eventual two networks, with Celcom most likely to operate the first network (Entity A), which is currently the DNB network. Note that, according to industry players we spoke to, all parties seeking to take an equity stake in a 5G network will have to initially take a stake in Entity A. Once entity A achieves 80% population coverage (currently ~69%), those interested to take a stake in the second network (Entity B) will sell their stakes to those remaining in Entity A. Participants in Entity B will rent capacity from Entity A until such a point that Entity B’s network achieves its coverage goals – which most players expect to take 2 years.

Reiterate Add with increased price target of RM5.18

We reiterate our Add call on CDB with an increased price target of RM5.18 (RM5.00 previously), based on an unchanged 11.6x FY24 adj. EV/EBITDA, i.e. DiGi’s pre-merger trough valuations prior to the merger announcement (April 2021). We see improved earnings (FY22-25F EPS CAGR of 24.4%) as the key rerating catalyst, with finalisation of the 5G network structure removing a key shroud over the overall sector. Key downside risks, in our view, are significant network disruptions and failure to merge systems and cultures, resulting in diminished synergies and earnings growth trajectory.

Source: CGS-CIMB Research - 18 Sep 2023