Results

• Earnings boosted by lower tax. Following the merger, CelcomDigi’s reported 1Q23 reported net profit dropped 24% YoY to RM321m due to higher device costs. Excluding the non-cash accelerated depreciation of RM258m (for the decommissioning of 7k sites this year), the merged entity’s normalised PAT rose 16% YoY to RM579m thanks to lower tax rate as Cukai Makmur ended.

• Steady revenue. Quarterly revenue increased 4% YoY to RM3.18b mainly due to higher Device sales (+26% YoY to RM511m) with flat Postpaid (+1% YoY to RM1.28b) and Prepaid revenue (+2% YoY to RM1.14b).

• Lower QoQ. 1Q23 reported PAT dropped 24% QoQ while quarterly revenue declined 4% QoQ mainly due to decline in Device sales (- 17% QoQ). Meanwhile, normalised PAT grew 37% QoQ. • Stable EBITDA margin – EBITDA margin was steady at 47.5% in 1Q23 vs 47.1% in 4Q22 as costs were kept under control.

• Strong subscriber growth. Following the merger, CelcomDigi has 20.3m subscribers in 1Q23 after growing 206k QoQ as Postpaid subscribers added 54k to 6.73m and Prepaid subscribers grew 146k to 13.46m thanks to its product offering and recovery in the migrant segment. Blended ARPU remains flat at RM42 (postpaid RM69 and prepaid RM28).

• Steady gearing. Net debt to EBITDA eased to 2.2x from 2.3x 4Q22. Free cash flow surged to RM696m from RM60m in 4Q22 due to lower capex of RM108m vs RM634m in 4Q22.

• Dividend declared. The Group declared its first interim dividend of 3.2sen/share. We are projecting a full year dividend of 12.7 sen which translates into a yield of 2.9%. CelcomDigi’s budgeted capex range of 15% to 18% of revenue allows the company some flexibility for 5G investments without affecting dividend payout.

• Guidance for 2023. The management maintained 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%.

• Synergy. The management also guided 2023 integration cost of RM200m and targeted gross synergy of RM200m-250m this year. To recap, 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). CelcomDigi aims to have 16k-18k sites and plans to decommission 7k sites and build 2k new sites. Its pilot network integration has recently gone live in Sitiawan and Rawang

Earnings Outlook / Revision

• Earnings within expectation. 1Q23 normalised net profit and revenue were in line with expectations after accounting for 23% and 31% of our FY23 forecasts respectively as we expect integration costs to kick in later this year.

• Earnings forecast maintained - We are keeping our FY23 and FY24 as earnings met our expectations.

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

Valuation and Recommendation

• We are maintaining our recommendation at SELL with an unchanged target price of RM3.87 as we expect earnings growth to be flat due to slow 5G adoption by consumers. Our target price is derived based on DCF valuation with a WACC of 6% and a long-term growth rate of 2.0%. Our target price also implies a 24x FY23F PER based on FY23F EPS of 16 sen.

Source: JF Apex Securities Research - 25 May 2023