Results

• Steady earnings. Following the merger with Celcom, Digi’s reported 4Q22 net profit dropped 86% YoY to RM43m mainly due to one month profit from Celcom (+RM79m), merger-related costs (- RM129m) and merger accounting adjustment (-RM133m). Excluding the one-offs, the merged entity’s normalised PAT rose 43% YoY to RM368m. Without Celcom’s contribution, Digi’s 4Q22 normalised PAT increased 11% YoY to RM287m.

• Higher revenue. Quarterly revenue rose 38% YoY to RM2.2b following the inclusion of one month revenue from Celcom. Excluding Celcom, Digi’s 4Q22 revenue rose 3% YoY to RM1.6b as higher Postpaid revenue and Device sales cushioned the decline in Prepaid.

• Flat QoQ. 4Q22 normalised PAT rose 29% QoQ due to the merger and was flat at RM287m without Celcom’s contribution. Quarterly revenue surged 42% QoQ with Celcom’s one month revenue of RM570m and 6.5% QoQ without Celcom, mainly due to higher Device sales.

• Lower EBITDA margin – The combined entity’s EBITDA margin was diluted to 44.5% in 4Q22 vs 48.9% in 3Q22 as after including Celcom’s lower margin contribution.

• Stable ARPU. Following the merger, CelcomDigi has 20.3m subscribers (6.67k postpaid and 13.54k prepaid). ARPU remains unchanged at RM41 after the merger. Both Celcom and Digi were almost equal in terms of subscribers and ARPU and would maintain both brands until network integration is completed after 2-3 years.

• Higher gearing. Net debt to EBITDA surged to 2.3x from 1.5x in 3Q22 and the merged company’s net debt almost tripled to RM13.9b following the consolidation of Celcom’s debt.

• Dividend declared. The Group declared its fourth interim dividend of 3.1 sen/share, making it a total of 12.2 sen for the year.

• Guidance for 2023. The management introduced the following guidance: a) growth in service revenue, b) flat to low single-digit increase in EBITDA, and c) capex-to-revenue ratio of 15% to 18%.

Earnings Outlook / Revision

• Earnings within expectation. Excluding Celcom’s contribution, full year normalised net profit of RM1.12b (-2% YoY) and revenue of RM6.2b (-2% YoY) were in line with our FY22 forecast.

• Earnings forecast adjusted - We have adjusted our FY23 and FY24 figures to include the impact of the merger with Celcom’s contribution coming on board.

• Major risks include market competition from other telcos and slower than expected integration to realise synergies and economies of scale.

• Synergy. The management expects to achieve net NPV synergies of RM8b, to be realised over 5 years with the huge chunk coming from network integration (RM5.5b), IT (RM1.1b) and others (RM1.4b). Network integration is expected to be fully completed in 2-3 years due to large number of sites by both telcos (Celcom 12,231 and Digi 11,640).

• We are positive that the merger will create a stronger entity with higher market share and economies of scale. However, we are concerned about earnings and dividend yield dilution following the enlarged share cap. Going forward, 2023 dividend yield could drop to 2.1% from 3.6% in 2022.

Valuation and Recommendation

• Following the rise in share price, we are downgrading our recommendation to SELL with a higher target price of RM3.87 (previously RM3.79). We lifted our target price in view of improved growth potential post-merger. Our target price is derived based on DCF valuation with a WACC of 5.71% and a longterm growth rate of 3%. Our target price also implies a 34x FY23F PER based on FY23F EPS of 8 sen.

Source: JF Apex Securities Research - 27 Feb 2023