Review

• CelcomDigi reported 9MFY23 net profit of RM1,128mn (-22.6% YoY). Excluding exceptional items, 9MFY23 core net profit stood at RM1,643mn (+12.8% YoY), lifted by higher service revenue, cost discipline, and the absence of Cukai Makmur. Core earnings was normalised to exclude the impact of accelerated depreciation from the revision in assets useful life and sites rationalisation since 4QFY22. Against expectations, core earnings came within ours but above consensus full-year estimates at 71.1% and 99.7% respectively. Consensus variance is possibly due to the varying treatment on the accelerated depreciation.

• CelcomDigi declared a 3rd interim dividend of 3.3sen (3QFY22: 3.4sen). This brought 9MFY23’s to 9.7sen (9MFY22: 9.0sen) which implies a payout ratio of 101.9%.

• YoY. 9MFY23’s service revenue and EBITDA grew 0.3% YoY and 3.6% YoY to RM8,124mn and RM4,558mn. This was anchored by: i) the prepaid and home fibre segments on subscriber acquisitions and healthy data adoption, and ii) higher contributions from the wholesale business. They more than offset softness from the postpaid segment which was affected by lower usage and further regulatory curbs on bulk messaging traffic. Meanwhile, EBITDA was also lifted by cost discipline across areas including regulatory, staff, and sales and marketing, which led EBITDA margin to improve 0.6pp YoY to 48.4%. Coupled with the absence of Cukai Makmur, core net profit increased 12.8% YoY to RM1,643mn.

• QoQ. 3QFY23’s service revenue was resilient as it grew marginally 0.2% QoQ to RM2,713mn on higher contributions from the prepaid, home fibre, and wholesale segments, albeit cushioned by softness from the postpaid segment. Meanwhile, EBITDA climbed 5.9% QoQ to RM1,567mn thanks to lower operating expenses from network related, regulatory, and sales and marketing costs.

• During 3QFY23, CelcomDigi’s total subscriber base expanded further to 20,600k (+123k QoQ, +636k YoY), underpinned by net adds across all segments including postpaid, prepaid, and home fibre. The postpaid segment (+92k QoQ, +212k YoY) was spurred by multiple attractive packages and bundles, while the prepaid segment (+22k QoQ, +398k YoY) was uplifted by the introduction of new 5G internet passes and Juara Kombo for targeted segments. Meanwhile, the home fibre segment (+8k QoQ, +26k YoY) was driven by the launch of new high-speed fibre plans.

Impact

• We maintain our earnings forecasts.

Outlook

• FY23 Guidance Maintained. For FY23, management reaffirmed 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 across network (RM5.5bn), IT (RM1.1bn), and others (RM1.4bn). Management shared that the group is on track with earlier guidance for FY23 including: i) gross synergies at ~RM200mn to ~RM250mn (versus 9MFY23: RM98mn), and ii) integration cost at ~RM200mn (versus 9MFY23: RM60mn). As of end-October 2023, the group has completed modernisation of 4,402 sites (78% on track) and phased out 1,633 sites (64% on track). This has led to improved customer experience as measured via download speed (+12% to +17%), signal strength (+9% to +17%), and data traffic (+7% to +10%).

• 5G. CelcomDigi has continued to actively promote its 5G offerings to consumers and enterprises. 5G-device users remain small at ~11.3% of the group’s subscribers. Meanwhile, momentum within the enterprise space is observed via the partnership with DHL to launch Malaysia’s first 5G-powered AI autonomous inventory management system. While efforts to accelerate 5G adoption to enterprises included the organisation of nationwide MY5G Conference & Showcase.

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 - 20 Nov 2023