CDB’s 1QFY24 results was in line with expectations as better economies of scale post merger more than compensated for the slight weakness in mobile service revenues. Moreover, bottomline was boosted by lower taxes and tapered accelerated depreciation. We maintain our FY24F earnings, but raise our TP by 2% to RM5.97 (from RM5.83) as we roll forward our valuation base year. Maintain OUTPERFORM.

Commendable due to cost beat. Its 1QFY24 core net profit of RM534m (+97% YoY) tracked expectations – coming in at 26% of our full-year forecast and the consensus estimate. CDB declared 1QFY24 DPS of 3.5 sen (1QFY23: 3.2 sen), which was within our expectation.

Non-core exceptional items include chunky integration costs of RM156m (1QFY23: RM16m). This was largely attributed to one-off severance package amounting to c.RM139m for CDB’s voluntary separation scheme (VSS) completed in 1QFY24.

Softer mobile service revenues. Lower service revenue (-1.1% YoY) in 1QFY24 fell short of CDB’s guidance of low-single digit growth. This mainly emanates from: (i) lower interconnect rates (effective: Mar 2023), (ii) reduced bulk messaging traffic, and (iii) overall softer mobile usage. As such, this more than offset improved segmental revenues from: (i) home and fiber: on the back of an enlarged subscriber base (net adds: 38k), and (ii) wholesale: due to higher traffic demand.

Bigger is indeed better. In spite of topline weakness, EBITDA inched up 1.3% YoY given improved economies of scale as merger synergies progressively unfold. On the back of this, and coupled with lower depreciation and taxes, 1QFY24 core profit almost doubled YoY.

The reduction in depreciation charges were attributed to the revision in asset useful life since 2023 after the merger. Hence, the majority of the impacted assets were fully depreciated in 1QFY24. Correspondingly, this was reflected in lower accelerated depreciation charges of RM30m in 1QFY24 that has significantly tapered off post-merger. Meanwhile, taxes were lower following reversal of over-recognition of tax provision in prior periods.

Mixed ARPU and subscriber base trends. Post merger, CDB sustained its traction in quarterly subscriber net adds for postpaid (+61k) and home fiber (+13k). Postpaid additions in 1QFY24 were primarily driven by higher take-up of family and mid-value plans. On the other hand, net contraction in prepaid subscribers widened QoQ to 161k (4QFY23: 137k net losses).

Nevertheless, 1QFY24 prepaid APRU was stable QoQ at RM28 since 1QFY23, while postpaid ARPU sustained its post-merger sequential decline to land at RM64 (4QFY23:RM66). Meanwhile, home fiber APRU dipped sequentially to RM112 (4QFY23:RM124, 1QFY23: RM126), possibly due to a one-off reclassification.

Key takeaways from its results briefing are as follows:

1. The VSS program, which received c.600 applications, will be implemented progressively through FY24. Hence, CDB expects to recognize cost savings totalling RM80m-90m progressively, starting from 2QFY24 until end-FY24. Following its completion, the group is expected to end up with a total workforce of c.3,500-3,700 employees.

2. CDB is ahead of schedule on its network integration and modernisation programme, with over 7,200 sites modernised and 2,716 sites phased out as at end April 2024. This program is expected to exceed 50% completion in seven states by end-June 2024.

3. CDB expects uplift in its postpaid ARPU and customer retention following the introduction of converged offerings. This emanates from options offered to customers that enable them to right-size their respective mobile plans.

4. Recent new projects secured by its enterprise business division include: (i) partnership with PETRONAS to deploy 5G and a private 4G network on Kasawari offshore platform, (ii) implementation of smart city solutions powered by 5G in Ampang Jaya, and (iii) collaboration with 10 universities to enable digital learning via the Metaverse, AI, robotics and 5G.

Forecasts. Maintained.

Valuations. Our TP is raised by 2% to RM5.97 (from RM5.83) based on 12.0x FY25F EV/EBITDA. This implies a 1x premium to the mobile players’ historical average of 11x to reflect post-merger synergies 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 economies of scale. Maintain OUTPERFORM.

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

Source: Kenanga Research - 29 May 2024