The key ESG pillars identified by CDB include: (i) inclusive and digital access, (ii) sustainable value chain, (iii) governance & performance culture, and (iv) environmental impact and action. CDB aspires to build an inclusive, sustainable and trusted digital society via these verticals, thus enabling “Trust in the age of digital-everything”. We maintain our forecasts, TP of RM5.97 and OUTPERFORM call.

We came away from CDB’s ESG Day 2024 with the knowledge that the group is steadily executing its judicious ESG strategies and measures.The key takeaways are as follows:-

1. To achieve inclusive and safe digital access, one of CDB’s key commitments include ensuring consistent network experience, benchmarked against independent connectivity performance providers. In addition, it will seek recertifications for Information Security MS ISO27001 & Business Continuity MS ISO22301 standards.

2. Meanwhile, to enable a sustainable value chain, CDB targets to achieve 90% annual close-out rate on non-conformities by 2025 for its suppliers and employees. Moreover, CDB has digitized its supply chains, prioritize local procurement, and conforms to ISO45003 guidelines on health & safety.

3. In the case of governance & performance culture, CDB has shown its commitment via the full completion of mandatory compliance modules and assessments. In addition, CDB ensures quality disclosures aligned to listing requirements and industry standards. Lastly, to cement its status as preferred employer, CDB intends to sustain its inclusion under Bloomberg’s Gender Equality Index. This is on top of maintaining diverse talent at all levels of the organization.

4. Under the environmental impact & action pillar, CDB has identified multiple decarbonization opportunities internally. This includes: (i) electrification and conversion of its tower sites to hybrid-solar powered gensets, (ii) deployment of solar and renewable energy at its buildings, (iii) migration of data to the cloud to reduce the carbon footprint of its data centers that account for 20% of energy consumption, and (iv) emphasis on 5G technology for data transmission as it generates more data (GB) per energy consumed. On top of that, CDB aspires to complete its Net Zero 2050 roadmap and validate targets aligned to SBTi (Science Based Targets initiative) by 2025.

5. CDB had recently completed the National Scam Awareness Survey 2024 with communities from c.307 National Information Dissemination Centres (NADI). Recall that NADI provides internet access to underserved communities, particularly at rural areas. The survey revealed that at least 73% of respondents experienced some form of scams or became victims of scammers. For various reasons, respondents with higher education and income levels encountered greater incidences of attempted scams. The survey also revealed that the most common channels used by scammers are voice calls (76%) and text messages (51%). In spite of the availability of the National Scam Response Centre hotline number (997), it was merely known to 36% of respondents.

ESG as usual. CDB’s reiteration of its commitments toward existing ESG goals are reassuring to know. By highlighting its ongoing ESG initiatives and practices, stakeholders may be comforted that CDB is on track to maintain its annual ESG results. As mentioned above, it seeks to: (i) maintain its various existing ISO certifications and index inclusions (e.g. Bloomberg’s Gender Equality Index), (ii) follow through with earlier plans to reduce carbon emissions (e.g. installation of solar panels on its premises), (iii) ensure its staff continue current practices of undertaking compliance modules, (iv) carry on with policy to prioritize local suppliers, and (v) press on with vetting of suppliers to ensure they comply with human rights and responsible business conduct. Therefore, we maintain our current ESG rating on the stock as there is no fresh material takeaway to prompt a review of our prior assessment. On the other hand, we may potentially review our rating after CDB completes its Net Zero 2050 roadmap that is aligned to SBTi (targeted by 2025).

Forecasts. Maintained. We also keep our TP of RM5.97 based on 12x FY25F EV/EBITDA. 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 - 17 Jul 2024