CDB’s 1HFY23 results met our forecast but disappointed the market. 1HFY23 EBITDA grew 2% YoY underpinned by a 3% growth in subscribers base on stable ARPUs. However, EBIT plunged by 30% due to accelerated depreciation which was a no-cash item. We tweak our forecasts down slightly, as well as our TP to RM5.06 (from RM5.15) but maintain our OUTPERFORM call.

1HFY23 core net profit of RM661m came in with our expectation at 53% of our full-year forecast but disappointed the market at only 40% of the full year consensus estimate.

It declared a DPS of 3.2 sen, cumulating in YTD DPS of 6.4 sen. This is on track to beat our full-year forecast of 9.0 sen (and hence we raise our forecast to 12.8 sen) as well as meet it guidance for a “better dividend” in FY23F vs. a 12.2 sen payout in FY22.

YoY (assuming that the Celcom-Digi merger took place in Jan 2022), its 1HFY23 revenue improved by 3%. This was driven largely by device segments inching slightly by 1% (mostly in 1Q). Service revenue was flat dragged by an underperforming wholesale segment (-5%) due to rate reduction effective from March 2023. EBITDA saw slightly slower growth (+2%) on higher network and IT costs but margin was stable at 47%. EBIT fell 30% on accelerated depreciation which commenced in 4QFY22.

QoQ, revenue declined 5% dragged by device segment on seasonal low usage. EBIT fell (-2%) on higher costs i.e. maintenance and marketing. A lower ETR of 26% saw earnings improved by 8%.

CDB’s subscribers (both mobile and home) continued to grow (3% YoY and 1% QoQ) to 20.5m - the postpaid segment grew (at 1% QoQ, 3% YoY) to 6.8m while the prepaid segment grew (at 1% QoQ, 3% YoY) to 13.6m. Home internet continued to see upward momentum at 24% YoY and 6% QoQ to 113k.

Its prepaid ARPU was stable YoY at RM28 but postpaid saw a slight decline of RM1 to RM68. On the other hand, home internet ARPU improved slightly by RM1 to RM127 on higher value plans.

The key takeaways from its results briefing are as follows:

1. CDB maintained its guidance for a flat-to-low single-digit EBITDA growth from a proforma FY22 EBITDA of RM6b.

2. Similarly, it maintained its guidance for a capex-to-total-revenue ratio of 15%-18% on all planned investments and ongoing merger activities, with capex significantly back loaded to 2HFY23. It also maintained its guidance for synergy amounting to RM8b in NPV arising from merger integration. CDB has seen lower integration costs over the last nine months thanks to savings from joint procurement.

3. CDB reiterated its commitment for incremental dividends post the merger. Based on a free cash flows of RM1.8b generated in 1HFY23, CDB appears poised to pay better dividend in FY23 vs. FY22.

4. The recent partnership with Huawei and ZTE provides CDB the opportunity to upgrade its entire 24k consolidated sites in the long run. However, it maintained its target of 16k to 18k sites over the next 3-4 year. As at Aug 2023, the upgrade on 2k sites has been completed (or 40% targeted under FY23).

5. CDB does not expect much impact from the recent launch of 5G from a competitor. CDB will focus providing a wide range offering, ranging from affordable to high-end which it has the scale to do so. It will also include an opt-in strategy for those who want 5G allowing consumers to have seamless 4G and 5G experience.

6. CDB said that the numbers of customers who have signed up for its 5G service remained relatively unchanged at 3m but only 11% are active users. In terms of 5G access charges, it has thus far booked in RM15m in its P&L. With its 4G service hitting 98% of population coverage by end-2023, the company remains confident about partial migration to 5G service.

We tweak our FY23-24F net profit forecasts down by 1% and 4%, respectively, to reflect higher interest expenses on higher dividend payouts. Similarly, we trim our TP by 2% to RM5.06 (from RM5.15). Our valuation basis is unchanged at 12x FY24 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: (i) as the merged entity is well entrenched in the public sector and migrant worker space, dominating the mobile market share at 43% and dwarfing other MNOs, (ii) for its competitive pricing and attractive bundling to attract migrant and domestic customers, (iii) for its foothold in the roll-out of 5G base from its nearest competitor at affordable prices. 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 - 21 Aug 2023