• Keep NEUTRAL, new DCF-based MYR4.35 TP (from MYR4.70), 1% downside and c.3% yield. CelcomDigi’s FY23 results were broadly in line with integration synergies trending ahead. While the initial phase of its network integration saw minimal disruptions, the heavy lifting for Phase 2 portends some execution risks, in our view, with integration cost set to accelerate. The stock’s risk-reward appears balanced with FY24F EV/EBITDA at 10x, with c.3% yield support.

• Broadly in line. 4Q23 PATAMI of MYR435.1m (-5% QoQ, +3% YoY) brought full year PATAMI to MYR1.56bn (+29% YoY – one month Celcom contribution). This formed 103% of our forecast (consensus: 94%). A reversal of credit allowance in 4Q23 marked a key deviation relative to our numbers. Meanwhile, FY23 net integration synergies (capex/opex) of MYR252m were ahead of expectations with integration cost (MYR114m) and capex intensity trailing guidance. A fourth interim DPS of 3.5 sen places FY23 DPS at 13.2 sen, or a dividend payout ratio (DPR) of 100% (minimum DPR is 80%).

• Postpaid gains on seasonality; fibre bundles seeing healthy take-up. CDB unveiled new/unified 5G postpaid packages in early Dec-23 – coinciding with the first anniversary of its merger. Note that competition has remained keen with its rivals also repricing their postpaid and prepaid offerings since the start of the year. The upselling/cross-selling of fibre broadband (FBB) bundles remain a key thrust, with FBB penetration at >40% of its mobile base, based on management’s earlier comments. Against a low-base, FBB revenue growth (FY23: +27%) should continue to outdo the subdued mobile revenue momentum going forward. The focus on FBB-mobile bundling is positive for subs retention (lower churn) and improves the customer lifetime value.

• Some execution risks with network integration activities ramp-up in FY24F. 2,400 sites were decommissioned and 5,665 modernised as at end- Dec 23 (Phase 1 integration). While the completion rate of 35% is ahead of the initial 30% target, Phase 2’s significant ramp-up (involving another 40% of sites) encompassing tier-two and tier-three cities/towns could pose some execution risks. CDB is also expected to return 10MHz of the 1800MHz spectrum – a condition previously set by the regulator. On guidance, FY24F service revenue growth is projected at low-single digit while EBIT is guided to be on par with FY23, suggesting still-elevated depreciation expense, with integration cost to increase in FY24F (no specific guidance on synergies). We lower FY24-25F core earnings 2-9% after factoring in the new guidance with FY26F introduced. Our DCF-based valuation is rolled forward accordingly.

• Key risks include network integration setbacks and weaker-than-expected earnings. A 6% ESG premium has been factored into our TP, based on our internal scoring methodology.

Source: RHB Research - 21 Feb 2024