Investment Highlights

• We maintain HOLD on CelcomDigi (CDB) with an unchanged DCF-derived fair value (FV) of RM4.80/share (WACC: 7.4% & terminal growth: 2%). Our FV reflects a 3% premium for the group’s 4-star ESG rating, implying FY24F EV/EBITDA of 11x, which is 0.5 standard deviation below its 5-year average of 12x.

• We tweak our FY24F-FY26F earnings downwards by 1% for higher interest costs arising from network integration exercises.

• CDB’s FY23 core net profit (CNP) of RM2.1bil was within our expectations but 46% above consensus. The group has declared a final dividend of 3.5 sen per share, bringing FY23 gross DPS to 13.2 sen (+8% YoY). This translates into a dividend payout ratio of 73%.

• CDB’s FY23 CNP increased by 3% to RM2.1bil, supported by a service revenue growth of 0.4%. This was in line with management's guidance of low single-digit growth. However, earnings growth was capped by higher interest expenses (+67% YoY) and increased cost of sales (+5% YoY) due to higher traffic charges (+8% YoY) and material costs (+3% YoY) in FY23.

• CDB recorded a stable net subscriber growth of 2% in FY23, on the back of a net addition of 31k Home Fibre subscribers (30% YoY). This was underpinned by enhanced product offerings and affordable fibre plans.

• Subscribers also improved in the postpaid (+4% YoY) and prepaid segments (+1% YoY) in FY23. The 4% increase in postpaid subscribers was driven by bundling of family packages, which offered lower prices compared to the principal line. This resulted in a 5% YoY decrease in postpaid ARPU from RM70 in FY22 to RM66 in FY23.

• On a sequential basis, CNP decreased by 16% to RM503mil in 4QFY23 from RM595mil in 3QFY23 as the tax charge more than doubled due to non-deductible tax expenses. This was partly mitigated by lower operating expenses (-3% QoQ) due to declines in depreciation (-37% QoQ) and reassessment of credit loss allowance (-23% QoQ).

• For FY24F, management guided for a low single-digit service revenue growth, flat EBIT and higher capex of RM2.19bil vs. RM1.76bil in FY23 as CDP plans to further upgrade 40% of its network towers.

• On the brighter side, CDB has improved the user experience. According to Opensignal, by leveraging on Celcom, Digi’s users are now able to enjoy a higher 4G download speed and 4G video experience. This is supported by the increasing proportion of Digi’s customers utilising spectrum blocks originally owned by Celcom, especially on the lower 900MHz band.

• Nevertheless, we are cautious in the near term as i) heightened user complaints resulting from constant service disruptions may impede subscriber retention rate, ii) regulatory risks on industry 5G structure may affect earnings, and iii) higher-than-anticipated integration costs may erode margins.

• However, in the long term, we think that CDB’s prospects are positive. The group has strong fibre and enterprise segments driven by a high smartphone penetration and subscribers with an avid consumption of high-definition content and strong affinity over social media.

• We may upgrade CDB if (i) synergies materialise sooner than expected, (ii) regulatory risks ease, and (iii) integration costs turn out to be lower than expected.

• CDB is currently trading at a 10.4x EV/EBITDA, which is 13% below its 5-year average of 12x. FY24F dividend yield is appealing at 3.2%.

Source: AmInvest Research - 21 Feb 2024