1HFY21 CNP of RM562m and DPS of 7.0 sen came within our estimates. As expected, postpaid subs continued rising at the expense of ARPUs, and prepaid subs continued falling on decreased migrant subs. With a larger portion of prepaid subs constituting local subs, their greater spending is lifting prepaid ARPU. DIGI continues to work on B2B 5G use cases, which we expect to begin contributing significantly earliest in FY24. Post results, we maintain our estimates. Maintain MARKET PERFORM with unchanged TP of RM4.25, based on 10.5x EV/EBITDA on Celcom Digi Berhad’s FY22E EBITDA of RM6b. We think near-term merger synergies have been priced in. Near-term headwinds include: (i) prolonged border closures, and (ii) further postpaid ARPU dilution.

1HFY21 within expectations. 1HFY21 revenue of RM3.2b came within our/street’s estimates at 52%/53%. 1HFY21 CNP of RM562m came within our/street’s forecasts at 48% each. 2QFY21 DPS of 3.6 sen brings 1HFY21 DPS to 7.0 sen, in line with our estimates.

YoY, 1HFY21 CNP fell 2.6% despite a 5.2% increase in revenue. Postpaid revenue fell 4%, dragged by a 6% drop in ARPU. Prepaid revenue fell 2%, weighed by a 7% drop in subs, due to the loss of foreign subs. Device revenue jumped 68%, as the subsidies from the Jaringan Prihatin program is encouraging greater take-up of smartphone plans. Core EBITDA fell 2.9% on: (i) higher traffic and network costs and (ii) higher device costs. CNP fell in tandem by 2.6%.

QoQ, CNP fell 5% despite a 4% increase in revenue. Postpaid revenue rose 1% on a 3% rise on postpaid subs. Prepaid revenue inched up 0.5% on a 3% increment on prepaid ARPU. Postpaid subs continued rising (+3%) at the expense of ARPUs (-2%), and prepaid ARPUs continued improving (+3%) on higher spend from local prepaid subs. While net profit rose in tandem by 6%, accounting for 1QFY21 fair value loss of RM22.5m, interest rate swaps and other one-offs caused CNP to decline by 5%.

Moving forward, we expect DIGI to continue gaining postpaid subs at the expense of postpaid ARPU. The Jaringan Prihatin program, coupled with DIGI’s entry-level postpaid plans, should continue to lift its postpaid subs base. On the prepaid front, DIGI will continue efforts to attract more Malaysian subscribers as border closures continue to reduce its migrant worker subs base. With the local subs’ greater spend (relative to foreign subs), we expect to see gradual uptick in prepaid ARPU. DIGI continues its work to develop 5G use cases in numerous industries, where we expect meaningful revenue contribution earliest in FY24. With the renewed lockdowns, DIGI has kept a close eye on its receivables, which is paying off as it hasn’t had to significantly increase its credit loss allowance (2QFY21: 0.9% of revenue vs. 1QFY21 of 0.6%). As telco services are essential, we suspect that those struggling financially are more likely to downgrade to cheaper postpaid plans or to prepaid altogether, rather than losing access from non-payments.

New CFO. We think Otto’s experience in M&A will help DIGI better navigate its merger with Celcom. (refer overleaf for more)

Post results, we maintain our FY21/FY22 estimates.

Maintain MARKET PERFORM on DCF-TP of RM4.25. The target price is based on a 10.5x forward EV/EBITDA on Celcom Digi Berhad’s FY22E EBITDA of RM6b. We believe the near-term merger synergies have already been priced in. Between now and when synergies meaningfully contribute in FY23, DIGI could continue to face headwinds in its declining migrant subs base and ARPU-dilutive postpaid offerings.

Risks to our call include: (i) the proposed merger failing to obtain the necessary approvals, (ii) better/worse-than-expected service revenue, (iii) weaker/stronger-than-expected OPEX, and (iv) weaker/stronger-than-expected competition.

New CFO. At the end of July, DIGI’s current CFO Inger Gløersen Folkeson will be departing and succeeded by Otto Risbakk. Having been with Telenor for 13 years, Otto was most recently Telenor’s CFO, and was previously its Senior VP for M&A. Prior to joining Telenor, Otto had also been a CFO at other firms. We think his experience in M&A will help DIGI better navigate its merger with Celcom.

Source: Kenanga Research - 19 Jul 2021