Results

• Improved earnings. CelcomDigi’s 2Q23 reported net profit dropped 28% YoY to RM348m but normalised PAT rose 10% YoY to RM518m after excluding non-cash accelerated depreciation.

• Flat revenue. Quarterly revenue increased 1% YoY to RM3.12b mainly due to higher Device sales (+13% YoY to RM416m) and Home Fibre revenue (+27% YoY to RM42m) amid flat Postpaid and Prepaid revenues at RM1.27b and RM1.14b respectively.

• Steady QoQ. 2Q23 reported PAT increased 24% QoQ mainly due to lower device costs as quarterly revenue fell 2% QoQ due to decline in device sales (-19% QoQ). Meanwhile, normalised PAT grew 2% QoQ.

• Lower EBITDA margin – EBITDA margin was slightly lower at 46.5% in 2Q23 vs 47.5% in 1Q23 as EBITDA declined 2% QoQ to RM1.48b.

• Strong subscriber momentum. CelcomDigi’s total subscribers increased 185k QoQ to 20.47m subscribers in 2Q23 following subscriber growth in all segments (Postpaid, Prepaid and Home Fibre). However, blended ARPU was slightly lower at RM41 vs RM42 in 1Q23.

• Steady gearing. Net debt to EBITDA eased further to 2.1x from 2.2x in the previous quarter. Free cash flow surged to RM1094m from RM696m in 1Q22 despite higher capex of RM252m vs RM108m in 1Q23. Management expects capex to accelerate in 2H23 due to ramping up of its integration activities.

• Dividend declared. The Group declared its second interim dividend of 3.2sen/share. Assuming a payout ratio of 80%, we are projecting full year dividend to hit 12.7 sen, which translates into a yield of 3%.

• 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%. The management reiterated 2023 integration cost of RM200m and targeted gross synergy of RM200m-250m this year.

Earnings Outlook / Revision

• Earnings within expectation. 1H23 normalised net profit and revenue were within our expectations after accounting for 56% and 47% of our FY23 forecasts and 52% and 64% of consensus respectively.

• Earnings forecast maintained - We are keeping our FY23 and FY24 figures in view of higher integration costs in 2H23.

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

• Synergy on track. 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).

Valuation and Recommendation

• We are upgrading our recommendation to HOLD with a higher target price of RM4.08 (previously RM3.87). after raising our cashflow assumptions. Our target price is derived based on DCF valuation with a WACC of 5.75% and a long-term growth rate of 2%. Our target price also implies a 27.5x FY23F PER based on FY23F EPS of 16 sen.

Source: JF Apex Securities Research - 21 Aug 2023