DIGI reiterated its guidance for RM8b savings (in NPV) from the merger synergy. On potential cuts in telco service prices mooted by the new government, DIGI holds the view that telco services are already highly affordable currently, and the deterrence to subscription comes largely from the lack of coverage and poor network quality in certain remote areas. We rationalise our FY22−23F earnings forecasts to reflect contributions from Celcom starting from Dec 2022. We raise our TP by 10% to RM4.69 (from RM4.28) and maintain our OUTPEROFRM call.

We came away from DIGI’s Investor Day last Friday feeling reassured of the prospects of the newly crowned largest mobile player in town following a recent merger. The key takeaways from the event are as follows:

1. On the statement by Communications and Digital Minister Fahmi Fadzil that the ministry is looking into the possibility of reducing the prices of telco services, CELCOMDIGI said that the ministry had been made aware during their discussions that: (i) telco service prices are currently already highly affordable, manifested in sustained industry subscriber growth in both the postpaid (+2% YoY) and prepaid (+9% YoY) segments in 3QCY22; (ii) the reason for the low telco subscription among certain segments of the population is not because of the price but rather the lack of coverage and poor network quality in certain remote areas (which means the solution shall instead be found in widening the coverage of good quality vs. cutting prices); and (iii) while the view of the younger group on the affordability of telco services locally will be taken into consideration, the group only makes up a very small part of the overall telco market.

2. The merged entity will be officially knowns as CELCOMDIGI by Feb 2023. Services have been streamlined as of 14 Dec but the full network integration is expected to be completed in 24 to 36 months. The two entities will maintain their respective products and services in the next 2 years as each caters for different segments of the market. Products and services that are relevant and successful after the end of the 2 years will be the spearhead of the new entity. During this 2-year duration, CELCOMDIGI also expects to innovate and introduce new products and services. The MCMC has set a target for CELCOMDIGI to position itself under a single corporate band within 2 years.

3. The key strength for CELCOMDIGI is the ability to tap into new growth areas and diverse communities given its in-depth and wider coverage. CELCOM’s key points are its network capacity with wider coverage while DIGI has in-depth coverage with an emphasis on urban areas. CELCOM’s 4G and 4G+ cover 96% and 90% of the population respectively while DIGI’s 4G and 4G+ are at 95% and 80%. Their combined 12k retail touchpoints and 500 branded outlets will be repurposed to support and strengthen the business.

4. CELCOMDIGI brings about 60 years of combined track record and scale. The entity will have stronger capacity to invest and drive digitalisation and innovation. It aims to be the largest Malaysian telco-tech company within 5 years and a top ESG performer in Malaysia by 2025.

5. Its guidance for RM8b savings (in NPV) from the synergy remains intact mainly from the network integration, including capex and opex (RM5.5b) and IT integration (RM1.1b). Thus, we maintain our cost savings synergy assumption of 5% for year 1 of the merger.

6. It intends to only provide FY23 earnings guidance for the new entity from the next quarter onwards when CELCOMDIGI becomes operational. It will provide 4QFY22 and FY22 accounts (P&L and balance sheet) of Digi and Celcom as standalone entities, as well as CELCOMDIGI as a merged entity in the 4Q22 and FY22 results’ announcement in Feb 2023.

Forecasts. We rationalise our FY22−23F earnings forecasts to reflect contributions from Celcom starting from Dec 2022, i.e. a 1-month impact in FY22F and a full-year impact in FY23F. Other assumptions for FY23 are: i) 5G access costs are revised down by 46% to RM313m (from 576m) on an incremental purchase based on a gradual nationwide rollout; ii) Celcom’s post-paid ARPU is raised to 29% back to RM80 to reflect the still separated products and services. Celcom’s prepaid ARPU is unchanged and so do DIGI’s post and prepaid ARPU of RM30, RM62 and RM31 respectively for FY23.

We like CELCOMDIGI for: (i) the merged entity that will be well entrenched in the public sector and migrant worker space, commanding the dominant market share in the mobile market at 43% (based on the MCMC’s Sep 2022 figures) and dwarfing other MNOs; (ii) competitive pricing and attractive bundling to attract migrant and domestic customers; (iii) the rollout of 5G that will likely further boost its subscribers given the absence of MAXIS in this early stage of the rollout; and (iv) the superior EBITDA margins of both DIGI and CELCOM at 5−6ppts above the industry average of 41−42%.

Correspondingly, we raise our valuation of CELCOMDIGI by 10% to RM4.69 (see below) on the account of higher EBITDA (up 7% due to lower 5G leasing charges). There is no adjustment to our TP based on ESG given its 3-star rating as appraised by us (see page 3).

Source: Kenanga Research - 19 Dec 2022