Investment Highlights

• Maintain HOLD on CelcomDigi (CDB) with an unchanged DCF-derived fair value (FV) of RM4.40/share (WACC: 7.4% & terminal growth: 2%). This implies an 11x EV/EBITDA, slightly below its 2-year average of 12x to reflect the downside risk of near-term higher-than-expected integration costs and service disruptions during network integration exercise. Our FV also reflects a 3% premium attributed to its 4-star ESG rating.

• We made no changes in our forecasts as CDB’s 1QFY23 results were largely in line with our expectation but above consensus. The normalised PATAMI of RM579mil accounts for 29% of the full-year estimate and 34% of consensus. We exclude RM258mil accelerated depreciation charges from revision of the group’s assets useful life and site rationalisation for our normalised earnings calculation.

• The 16% jump in the group’s earnings was backed by stronger revenue of RM3,180mil (+4% YoY). The service revenue grew 1% with all segments recording an improvement ie. postpaid (+1% YoY), prepaid (+2% YoY), home fibre (+27% YoY), except for wholesale & others (-7% YoY).

• The sequential 1% drop in revenue was mainly attributed to high base effect in 4QFY22 following seasonally higher usage due to year-end festivities. All segments reported lower sales QoQ, except for the home fibre unit.

• Operationally, the group’s total subscribers grew 206K QoQ driven by postpaid (+1.6x) and prepaid (+52%) segments. The spike up in postpaid subscriber base was boosted by higher take-ups in bundle offerings. The group’s blended average revenue per user sustained at RM42/month level, flattish QoQ and YoY.

• CDB also shared expectations to realise a gross synergy of RM200mil-RM250mil and incur an integration cost of RM200mil in FY23F. This will be a part of the group’s net NPV synergy target of RM8bil from the Celcom-Digi merger.

• Leveraging on its core mobile business, the group plans to drive future growth through fibre and enterprise segments while at the same time investing in synergistic platforms for both brands.

• Nevertheless, the network integration exercise may pose a risk of constant service disruptions, which may lead to high subscriber churn rate. Prospective earnings also may be capped by near-term integration costs, while the positive synergy impact may not be immediate.

• We believe the current valuation of 10.7x EV/EBITDA (12% discount to 2-year average) is justifiable, reflecting nearterm risks posed by potential frequent service disruptions while expected synergies could take longer or may not be able to materialise completely.

Source: AmInvest Research - 25 May 2023