CelcomDigi - Merger Benefits Materializing

Date: 
2024-02-21
Firm: 
KENANGA
Stock: 
Price Target: 
5.83
Price Call: 
BUY
Last Price: 
4.15
Upside/Downside: 
+1.68 (40.48%)

CDB’s FY23 results surpassed expectations as merger synergies yielded savings while a slight growth in service revenues provided a boost. The latter emanates from an enlarged prepaid and home subscriber base. We raise our FY24F earnings by 34%, lift our TP by 9% to RM5.83 (from RM5.34) and maintain our OUTPERFORM call.

Its FY23 core net profit of RM1.9b exceeded our full-year forecast by 35% and consensus estimate by 9%. CDB declared 4QFY23 DPS of 3.5 sen which brings cumulative FY23 DPS to 13.2 sen (FY22: 12.2 sen).

The outperformance versus our forecast was mainly attributed to: (i) lowerthan-expected depreciation in 4QFY23, and (ii) chunky reversal (RM96m) of expected credit losses on receivables. The latter was recognized in 4QFY23 (4QFY22: RM57m provision) following a reassessment of credit allowances. This was in tandem with CDB’s updated collection policy to reflect improved turnaround time for collection of billings in the post-Covid era.

Its FY23 core net profit excluded: (i) integration cost (RM114m) incurred for organizational setup, brand campaigns and professional fees, etc., and (ii) asset write-off (RM266m) recognized in 4QFY23. The latter followed the suspension of an ongoing IT project (billing system platforms) that was implemented before CDB’s merger with Digi.Com.

Merger synergies are evident. Its FY23 service revenue improvement (+0.4% YoY) was mainly driven by the prepaid and home segments due to subscriber base expansion and higher prepaid ARPU. This more than offset weakness from the postpaid segment on the back of: (i) dip in interconnect rates (effective: Mar 2023), (ii) reduction in on-demand data, and (iii) softer bulk SMS traffic.

The combination of topline expansion and lower opex enabled CDB to offset higher costs from: (i) increased handset device sales, and (ii) traffic charges due to improved demand for data. Hence, this led to FY23 EBITDA growth of 9.5% YoY that exceeded CDB’s flat-to-low single-digit EBITDA growth guidance.

Its FY23 core net profit growth (+6% YoY) was propelled by the above, coupled with the absence of Cukai Makmur. This more than offset drag from accelerated depreciation due to the revision in assets’ useful life. To recap, as part of CDB’s post-merger network integration exercise, the useful life for its mobile network assets and sites earmarked for decommissioning was lowered to 7 years (from 10 years).

QoQ, earnings soared due to a dip in depreciation. Its service revenue growth (+0.9% QoQ) was largely underpinned by the following segments: (i) postpaid: on the back of higher roaming activities, and (ii) wholesale: increased traffic demand.

In spite of a seasonal jump in handset device costs, sequential earnings surged by 46%. This was mainly driven by: (i) reversal of expected credit losses (as highlighted above) and (ii) lower depreciation following CDB’s final PPE (property, plant and equipment) assessment that led to lowered fair values for its net assets.

Cleaned up its prepaid base… In 4QFY23, prepaid subscribers contracted by 131k QoQ following the removal of non-revenue generating subscribers. Nevertheless, CDB still ended the year with an enlarged base of 13.5m prepaid subscribers (YoY: +170k). On the same note, for the prepaid segment, CDB added 266k subscribers in FY23, thus expanding its base to 6.9m customers. This was driven by sustained traction in quarterly net adds since 1QFY22.

…but postpaid ARPU weakness prevailed. On the other hand, whilst ARPU for the home fiber segment remained stable YoY, there was weakness in the mobile segment. In particular, postpaid ARPU sustained its quarterly decline to RM66 (4QFY22: RM70) due to the headwinds highlighted above (i.e. lower interconnect rates, on-demand data and bulk SMS traffic).

Key takeaways from its results briefing are as follows:

1. CDB introduced its FY24 guidance, comprising: (i) service revenue growth: low-single digit increase (FY23: +0.4%), (ii) EBIT growth: similar to 2023, and (iii) capex intensity: c. 15%-18% (FY23: 13.8%). However, FY24 guidance does not include the impact from the looming implementation of the new 5G Dual Network model.

2. The group guided for higher integration costs in FY24 (FY23: RM114m) that will be driven by expenses to consolidate retail outlets and IT systems, amongst others. Nevertheless, FY24 depreciation costs are expected to be slightly lower (by circa RM100m) given a smaller asset base following the accelerated depreciation exercise in FY23.

3. CDB realized gross merger synergies of RM366m (net: RM252m) in FY23. This emanated from: (i) procurement efficiencies due to economies of scale, and (ii) contract re-negotiations that led to better commercial terms - particularly for network integration and modernisation. Moving forward, these cost synergies will flow through to bottomline via lower depreciation and opex savings.

4. CDB is ahead of schedule in achieving its overall network integration target. To-date, it has reached 35% completion where 5,665 sites were modernized whilst 2,400 sites were phased out.

Forecasts. We raise our FY24F net profit forecasts by 34% to reflect lower opex and depreciation. In addition, we also introduce
our FY25F numbers.

Valuations. Correspondingly, we raise our TP by 9% to RM5.83 (from RM5.34) based on unchanged at 12x FY24F EV/EBITDA. This implies a premium to the mobile players’ historical average of 11x to reflect post-merger synergies, pricing power and economies of scale. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We like CDB for the following reasons: (i) merger synergies are expected to amount to NPV of RM8b over 5 years – emanating from network (RM5.5b), IT (RM1.1b) and others (RM1.4b), (ii) robust average FCF yield of 7.9% in FY24-25 implies capacity to pay steady dividends, and (iii) leading subscriber base share of 39% and 20% in the postpaid and prepaid segments, respectively, translating to pricing power and economies of scale. Maintain OUTPERFORM.

Risks to our call include: (i) slower-than-expected realization of merger synergies, (ii) unfavourable outcome to the implementation of the 5G dual network by the government, and (iii) competition between mobile players turn irrational.

Source: Kenanga Research - 21 Feb 2024

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