CDB’s 1QFY23 results disappointed technically due to higher-than-expected depreciation cost. Operationally, both its revenue and EBITDA  met expectations, thanks to its resilient subscribers and ARPU. It reiterated its guidance for a low single-digit EBITDA growth. We  rationalise down our FY23-24F earnings forecasts by 42% and 55%, respectively, but maintain our TP of RM5.15 and OUTPERFORM call.

1QFY23 core net profit of RM317m technically disappointed, coming in at  only 15% and 18% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely  from an additional RM258m depreciation charge stemming from the  revision in assets’ useful life and sites rationalisation that was non-cash in  nature. The declared DPS of 3.0 sen was within our expectation.

YoY (assuming that the Celcom-Digi merger took place in Jan 2022), its  1QFY23 revenue improved by 4% (accounting for 28% of our full-year estimate). This was driven largely by both postpaid and prepaid segments which grew 1% and 2%, respectively. EBITDA grew 3% with a stable margin of 48%. EBIT fell by 30% due to the above-mentioned items.  Stripping off this non-cash items, normalised core net profit would have ended at RM579m or +16%.

QoQ (assuming that the Celcom-Digi merger took place in Jan 2022), its revenue declined 4% on seasonal high usage over the prior year-end festivities from both services and device segment. EBIT fell on higher depreciation costs as mentioned above dragging core net profit down by  24%.

CDB’s mobile subscribers continued to grow (3% YoY and 1% QoQ) to  20.3m - the postpaid segment grew (at 1% QoQ, 2% YoY) to 6.7m while  the prepaid segment grew (at 1% QoQ, 3% YoY) to 13.5m. Home internet  grew 24% YoY and 5% QoQ to 107k.

YoY, prepaid ARPU saw stability YoY at RM28 but postpaid saw a slight  decline of RM2 to RM69. On the other hand, home internet ARPU  improved by RM4 to RM126 on higher value plans.

The key takeaways from the results’ briefing are as follows:

1. It reiterated its guidance for a flat-to-low single-digit EBITDA growth  from a proforma FY22 EBITDA of RM6b (12 months for both Digi and  Celcom).

2. Similarly, it maintained its guidance for a capex-to-total-revenue ratio  of 15%-18%, a tad higher than 13% in FY22 due to integration  initiatives. The additional RM258m depreciation cost in 1QFY23 is likely to recur during the next three quarters. The Integration initiatives will last for 3-5 years and hence capex-to-total-revenue ratio is likely to stay at high teens (vs. 12% for Digi prior to the merger).

3. CDB was unable to shed light on the Dual Wholesale Network (DWN)  model. For now, CDB is offering support in terms of sharing its infrastructure with Digital Nasional Bhd (DNB) to enable the latter to achieve the 80% population coverage target by end-2023. CDB holds the  view that the current access agreement will be modified once the second  5G network under the DWN model comes onstream.

4. CDB has almost 3m 5G customers of which only 11% are active users. In terms of access charge, only RM1m was booked in its P&L.  Despite the low usage, the company is confident of higher usage going forward as its own 4G population coverage will reach 98% by  end of 2023, supporting more usage of 5G.

We rationale down our FY23-24F earnings forecasts by 42% and 55%, respectively, to bring ourselves in-line with the latest results announcement. Our TP is unchanged at RM5.15 as the earnings revisions are largely non-cash in nature and we also roll forward our valuation base year to FY24F (from FY23F). Our valuation basis is unchanged at 12x EV/EBITDA, which is still at a discount to the sector’s historical average of 13x to reflect the risk of the government back pedalling on the DWN model for the 5G rollout. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We still like CDB for: (i) the merged entity that will become well entrenched in the public sector and migrant worker space, dominating the mobile market share at 43% and dwarfing other MNOs, (ii) its competitive pricing and attractive bundling to attract migrant and domestic customers, (iii) the roll-out of 5G that will likely further boost its subscriber base given the absence of MAXIS at this early roll-out stage. Maintain OUTPERFORM.

Risks to our call include: (i) regulatory risk with a more progressive-leaning political inclination, (ii) unfavourable terms to mobile network operators with regards to the 5G rollout, and (iii) competition between players turns irrational.

Source: Kenanga Research - 25 May 2023