CelcomDigi - Distorted by Accelerated Depreciation

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  • Keep NEUTRAL, new MYR4.60 DCF TP from MYR4.32, 4% upside, c.3% yield. CelcomDigi’s (CDB) results were broadly in line. Alongside seasonal factors, the accelerated depreciation charge of MYR258m crimped 1Q23 core earnings. We lift FY24-25F forecasts on stronger realisation of merger synergies and incrementally higher ARPU from bundling efforts. Our TP includes an in-house derived 6% ESG premium.
  • 1Q23 (maiden full quarter post merger) core PAT of MYR321m was down 24% QoQ (-36% YoY) on a comparable basis (assuming the merger with Celcom was in place since 1Q22). This formed 24% of our forecast (consensus: 18%) while EBITDA made up 27% of our/consensus full-year forecasts. The key stand-out was the accelerated depreciation charges (non-cash) from the decommissioning of sites, which crimped PAT (-36% YoY, -24% QoQ). An in-line 3.2 sen DPS was declared (117% payout), with a minimum 80% payout guidance instituted.
  • Service revenue flat. On a comparable basis (including home and fibre revenue), service revenue dipped 0.8% QoQ (+0.9% YoY) against the higher base in 4Q22. Postpaid and prepaid revenue eased -1% and -0.6% sequentially, weighed down by lower interconnect rates. Meanwhile, home fibre revenue grew 8.1% QoQ (+29% YoY) on stronger bundling efforts. Mobile subs growth was noticeably stronger at Digi relative to Celcom.
  • 5G developments. Greater clarity on the dual network process is expected in the coming months. There was little insight from management as to the preferred option and 5G capex spend, with discussions ongoing. We expect DPS payout to sustain with distribution supported by FCF. CDB has 2.8m provisioned 5G customers on the combined network, of which c.11% (0.3m) are active subs.
  • Forecast adjustments. Management guided for integration cost of c.MYR200m for FY23F with gross synergies of MYR200-250m. We expect capex to play catch-up in subsequent quarters, given the low capex intensity of 3.4% in 1Q23 relative to the full-year guidance of 15-18% and the focus on network quality. We retain FY23F forecasts but lift FY24-25F core earnings by 9-15% after factoring in stronger merger synergies and incrementally higher ARPU from bundling activities. Key risks: Competition, merger execution (delay in opex/capex synergies), and regulatory setbacks.
  • ESG framework update. As there is now a greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future

Source: RHB Research - 25 May 2023

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