Review

• CelcomDigi reported 1HFY23 net profit of RM669mn (-31.7% YoY). Excluding exceptional items, 1HFY23 core net profit of RM1,045mn (+6.6% YoY) came within ours but above consensus full-year estimates at 45.2% and 63.8% respectively. Core earnings excludes accelerated depreciation from the revision in assets useful life and sites rationalisation.

• CelcomDigi declared a 2nd interim dividend of 3.2sen (2QFY22: 2.8sen). This brought 1HFY23’s to 6.4sen (1HFY22: 5.7sen) which implies a payout ratio of 113.5%.

• YoY. Service revenue and EBITDA grew 0.3% YoY and 1.8% YoY to RM5,411mn and RM2,991mn. This was driven by the postpaid, prepaid, and home fibre segments on the back of subscriber acquisitions, albeit partly offset by lower contribution from the wholesale segment. EBITDA was also lifted by cost optimisation which offset higher traffic growth and integration costs. Note that if excluding integration costs EBITDA grew at a higher pace of 2.6% YoY. Coupled with the discontinuation of Cukai Makmur, core net profit increased 6.6% YoY to RM1,045mn.

• QoQ. Service revenue improved marginally 0.2% QoQ to RM2,708mn with growth from the prepaid, wholesale, and home fibre segments offsetting lower contribution from the postpaid segment. Postpaid revenue was impacted by interconnect rate reduction, lower on-demand services and curbed messaging traffic.

• In 2QFY23, CelcomDigi’s total subscriber base expanded to 20,447k (+185k QoQ, +599k YoY), underpinned by net adds across all segments including postpaid, prepaid, and home fibre. The postpaid segment (+46k QoQ) saw higher take-ups of smart and family bundles, while the prepaid segment (+133k QoQ) was uplifted by Malaysians, migrants, and tourists. As for the home fibre segment (+6k QoQ), net adds was driven by the continued take-up of high value plans.

• Meanwhile, ARPU was resilient across postpaid (-1.4% QoQ to RM68), prepaid (unchanged QoQ at RM28), and home fibre (+0.8% QoQ to RM126).

Impact

• We maintain our earnings forecasts.

Outlook

• FY23 Guidance Maintained. For FY23, management reiterated guidance for CelcomDigi’s: i) service revenue to maintain growth momentum, ii) EBITDA to increase by flat-to-low single digit %, and iii) CAPEX-to-total revenue ratio at around 15% to 18%. This excludes the potential impact from 5G implementation.

• Merger Integration on Track. To recap, the merger of Celcom and Digi is expected to realise net NPV synergies worth RM8.0bn – from network (RM5.5bn), IT (RM1.1bn), and others (RM1.4bn). Management shared that the group is on track with earlier guidance for FY23 – for gross synergies at ~RM200mn to ~RM250mn and integration cost at ~RM200mn. As of August 2023, the group has completed integration of ~2k out of the ~5k targeted sites for 2023 and thus far, efforts have been encouraging with overall experience uplift in integrated areas.

Valuation & Recommendation

• In all, we maintain our Hold recommendation on CelcomDigi with unchanged TP of RM4.60 based on 11.0x EV/EBITDA CY24F EBITDA.

• Key risks unfavourable terms for 5G commercialisation, heightened price competition, and regulatory changes.

Source: TA Research - 21 Aug 2023