• Keep NEUTRAL and MYR4.35 TP (DCF), 9% upside. CelcomDigi’s 1Q24 results met our expectations but was a consensus miss. While the network integration is tracking well, it continues to cede revenue market share (RMS) to the green camp with ARPU compression. Valuation is fair at -1SD of its historical EV/EBITDA mean, given execution and regulatory risks. Our TP includes a 6% ESG premium.

• Staff redundancy cost booked. 1Q24 earnings of MYR376m (-14% QoQ, +17% YoY) made up 23% of our full-year forecast but 19% of consensus’, which likely excluded accelerated depreciation. A voluntary separation scheme (VSS) cost of MYR139m formed part of the overall integration cost of MYR156m in 1Q24 and normalised from underlying PAT. For consistency, we used reported PATAMI as the basis, given prior assumptions on synergies. We deem the earnings to be in line, with stronger opex synergies anticipated in the subsequent quarters, partially offset by a normalisation in tax expenses (from 1Q24’s exceptionally low ETR) and credit allowance. Reported EBITDA fell 17% QoQ (-12% YoY) largely from the VSS impact. A first interim MYR0.03 DPS (1Q23: MYR0.032) translates into a DPR of 109%.

• Ceding mobile RMS. Service revenue eased 2.3% QoQ on seasonality (-1.2% YoY) – the fourth consecutive quarter of YoY decline with extended weakness across prepaid and postpaid. This was partially buffered by wholesale and fibre revenue growth. Relative to Maxis’ (MAXIS MK, NEUTRAL, TP: MYR4) 3.1% YoY uplift in mobile revenue, we estimate CDB’s RMS (Big-2) fell further to 56.3% in 1Q24 (1Q23: 57.6%, 4Q23: 56.7%), with postpaid ARPU down 6% YoY for the quarter.

• MYR426m in 1Q24 gross merger synergies made up 60% of the MYR700m targeted gross synergies for FY24 (FY23: MYR366m). Of the gross synergies booked in 1Q24, c.MYR140m relates to opex (c.33%), which was offset by integration cost of MYR156m, implying net opex synergies of -MYR16m. CDB nonetheless expects MYR80-90m in synergies in FY24F from the headcount reduction, in line with our broader opex synergy assumptions.

• Network integration nears halfway mark. Over 7k sites have been modernised to date (>2,716 sites decommissioned), translating to an overall completion rate of >44%. It targets a 75% completion rate by end-2024 with a fully integrated network by FY25F. Management cited a random issue with a firewall/security upgrade that caused the 21 May network outage (not related to the integration). Key risks: Weaker/stronger-than-expected earnings, regulatory setbacks, execution of nationwide network integration.

Source: RHB Research - 29 May 2024