1HFY22 results came in broadly in-line with our forecast but missed consensus estimates. Its subscribers, in both prepaid and postpaid segments, continued to grow while blended ARPU remained stable. The Company reiterated its guidance for a rebound in service revenues in FY22 but expects a slight dent to EBITDA margin on merger cost and inflationary pressures. Reiterate OUTPERFORM. We rationalise our TP to RM4.25 (from RM3.70 previously) to reflect our valuation for Celcom DIGI post the merger. There is no adjustment to TP based on its ESG rating which is given a 3-star as appraised by us.

Broadly in-line with our, but fell short of market, expectation. 1HFY22 CNP of RM461m made up 45% and 42% of our full-year forecast and consensus’ estimates, respectively. We consider the results broadly within our expectation but missed consensus. A DPS of 2.8 sen declared brought interim DPS to 5.7 sen (implying a 96% payout) vs. our full-year expectation of 12.6 sen.

Results’ highlight. YoY, revenue declined 3.4% YoY to RM3.1b underpinned by a slower performance from service revenue (-1.6%) to RM2.6b. EBITDA (at RM1.49b) was flat YoY but margin improved by 180bps to 48.5%. CNP declined 17% YoY to RM461m as ETR came in at 38% on account of the Cukai Makmur and deferred tax. QoQ, revenue rebounded (1.1%) to RM1.5b. EBITDA was flat at RM742m but margin saw slight erosion (50bps) to 48.2%. ETR saw 3ppt uptick to 39% on non-cash hedge accounting and deferred tax.

Its mobile subscribers continued to grow (+2.7% YoY and +2.6% QoQ) to 10.5m. The postpaid segment grew for a 7th consecutive quarter (+1.2% QoQ, 5.8% YoY) to 3.4m while the prepaid recovered (+3.3% QoQ, +1.4% YoY) to 7.1m after three consecutive quarters of decline. The postpaid subscribers grew on higher demand for high-speed subscriptions and attractive bundling while the prepaid saw stronger demand from the local population as well certain higher-yielding migrant subscribers.

Both the home fibre and B2B segments continued to grow YoY and QoQ. The home fibre subscription grew 4x to 21k from a year ago with 4k subscribers added in 2QFY22. ARPU was up RM20 to RM127 underlining healthy contracting activities and take-ups from its existing mobile base. B2B saw growth in both revenue and subscription with revenue rising 13% YoY and 3% QoQ while subscription grew 17% YoY and 2% QoQ as customers embraced digitalisation. The positive momentum was sustained on higher notable contracts from large enterprises from the O&G, banking and conglomerate sectors.

Key takeaways from the results’ briefing are as follows:

1. The company remains confident of a rebound in service revenue for full-year (despite a slow start in 1H) driven largely by the gradual return of migrant workers (who are inclined to subscribe to its prepaid packages);

2. The company guided for EBITDA margin to slip slightly from the current level of 48% going forward due to costs incidental to the merger exercise, as well as higher utility bills (which is consistent with our assumption of 47%). Meanwhile, its tax rate may exceed the guided 33% on deferred taxation and non-deductible expenditure;

3. It reiterated its guidance for FY22 capex to be at 13% of total revenue (which is consistent with FY21);

4. DIGI refrained from commenting on its plan with regards to Digital Nasional Bhd (DNB), the SPV set up by the government for the implementation of 5G, as well as DNB’s single wholesale network (SWN) model. To recap, it was widely reported that six mobile network operators including DIGI are poised to acquire a 70% stake in DNB. We take it as negotiations (or possibly fine-tuning) with the government on pricing and annual outlay commitment are still on-going;

5. The Company is confident that the Celcom Digi merger will be completed in 2H 2022. With the MCMC having given its green light, the only outstanding approvals are those from Bursa Malaysia and the Securities Commission.

Earnings changes. We fine-tuned our FY22E earnings lower by 4% due to higher ETR but maintain our FY23E forecast. No change to our EBITDA assumptions of 47%.

Investment case. We like DIGI for: (i) it being a recovery play with its B2B segment driven by the re-opening of the economy while its prepaid segment is underpinned by the return of foreign workers, (ii) its superior EBITDA margin at 47%-48%, vs. the industry average of 41%, and (iii) the merger with Celcom, giving birth to a new market leader in the mobile market with combined market share of 44%. Reiterate OUTPERFORM. We rationalise our TP to RM4.25 (from RM3.70 previously) to reflect our valuation for Celcom DIGI post the merger. Our TP is based on 10x FY223F EV/EBITDA for Celcom DIGI, at a discount to the sector’s historical average of about 13x to reflect the dent to the sector’s fundamentals due to the less-than-ideal outcome for mobile network operators with regards to the 5G rollout. There is no adjustment to TP based on ESG (3-star ESG rating as appraised by us).

Risks to our call include: (i) the proposed merger between DIGI and Celcom fails to materialise, (ii) unfavourable terms to mobile network operators with regards to the 5G rollout, and (iii) irrational competition between players.

Source: Kenanga Research - 18 Jul 2022