KEY INVESTMENT HIGHLIGHTS

• Downgrade to NEUTRAL with a lower DCF-derived target price of RM3.53 post 3QFY24 results announcement
• 3QFY24 normalised earnings of RM400m (-23.5%yoy) was impacted by higher cost of sales and opex
• The above led to cumulative normalised earnings of +9.2%yoy to RM1,188m which was below our expectation
• Challenging revenue growth outlook to persist in the near-term while more time is need before a better cost structure can be seen

Near-term weakness to persist. We are downgrading our recommendation on Celcomdigi Bhd (CDB) to NEUTRAL with a lower target price of RM3.53 post the 3QFY24 results announcement.

Revenue outlook for the group seems tepid as the improvement in postpaid and home & fibre segment was barely offsetting the decline in prepaid and enterprise. Moreover, we note that there was a higher cost of material and traffic expenses while not much reduction in seen for the operating expenditure. Post the merger, there is only a considerable decline in depreciation and amortisation in view of lower capex which we view is inadequate. Management alluded that a more positive impact on the cost structure can only be seen from 2026 onwards.

Contraction in normalised earnings. CDB reported 3QFY24 earnings of RM437m, a decline of -32.7%yoy. Meanwhile, the normalised earnings were RM409m (-48.1%yoy). Despite a marginal improvement in revenue to RM3.1b (+0.7%yoy), there was a notable increase in cost of materials and traffic expenses to RM721.7m (+13.5%yoy) while opex remained at similar level of RM900m. This led to a lower profit margin of 13.1%.

Note, service revenue posted a +0.7%yoy contraction to RM2,689m. This was mainly led by lower prepaid service revenue which reflects the impact of SIM consolidation and focus acquisition. The enterprise segment revenue was also weaker due to lower contributions from mobile.

Disappointing result. The poor 3QFY24 financial performance led to 9MFY24 reported earnings of RM1,219m. On a normalised basis 9MFY24 earnings came in at RM1,188m, an improvement of +9.2%yoy. While revenue was stagnant at RM9.4b, the group recorded higher cost of goods sold as well as opex which led to single digit improvement in bottom-line. All in, CDB's 9MFY24 earnings performance came in below our expectation, making up 60% of our full year FY24 earnings estimates.

Conservative earnings estimates. Taking cues from CDB's 9MFY24 financial performance, we adjusted FY24 to FY26 earnings estimates lower by between -6.1% to -13.2%. We factored in slower service revenue growth and lower profit margin assumption.

Lower target price of RM3.53. Subsequent to the adjustment to our earnings forecast, we revised CDB's DCF-derived target price to RM3.53 from RM4.43 previously. Note that we also reduce the terminal growth to 1% which we think reflects the group outlook in the foreseeable term.

Source: MIDF Research - 19 Nov 2024