CDB’s 1HFY24 results were in-line with expectations due to lower taxes and depreciation. Service revenue trailed our forecast due to prepaid churn, but positively the postpaid segment sustained its net adds traction (+117k QoQ) with slight ARPU improvement. We maintain our OUTPERFORM call, but tweak our FY24F/25F earnings lower by 11%/13%, and lower our TP by 6% to RM5.59 (from RM5.97).

Tracked expectations. Its 1HFY24 core net profit of RM933.5m (+59% YoY) tracked expectations – coming in at 46% of our full-year forecast and 47% of the consensus estimate. CDB declared 2QFY24 DPS of 3.5 sen (2QFY23: 3.2 sen), bringing 1HFY24 DPS to 7 sen (1HFY23: 6.4 sen), which was within our expectation.

Sluggish mobile service revenues. 1HFY24 service revenue contraction (-0.8% YoY) was below CDB’s full-year guidance of low single-digit growth. This was largely attributed to subscriber attrition for: (i) prepaid: due to fewer rotational one time SIM acquisitions, and (ii) postpaid: given churn in enterprise mobile subs. Additionally, lower prepaid interconnect rates (effective: Mar 2023) and reduced postpaid bulk messaging traffic exacerbated topline weakness.

On the bright side, topline contraction was partially cushioned by growth at: (i) wholesale: due to higher sales from hubbing and new solution deals, and (ii) home fiber: uplifted by subscriber base expansion.

Bottomline uplift from lower depreciation and taxes. Despite weaker topline, 1HFY24 core net profit surged by 59% YoY due to lower taxes and depreciation (-16% YoY).

To recap, following the CDB merger, the useful life of affected assets was revised under an accelerated depreciation exercise. Most of these assets were fully depreciated by 1QFY24, which led to the decrease in YTD depreciation. Meanwhile, the lower effective tax rate of 17% in 1HFY24 (1HFY23: 28%) was attributed to: (i) deferred tax liability adjustments of RM51m in 1QFY24, and (ii) green tax incentive of RM47m in 2QFY24.

Postpaid momentum intensifies. Sequential subscriber net adds for both the postpaid and fiber segments snowballed to 117k and 18k, respectively, in 2QFY24. This translates to unrelenting traction in both segments since the completion of CDB’s merger in 1QFY23.

On the other hand, QoQ subscriber churn in the prepaid segment more than doubled to 378k in 2QFY24, marking three consecutive quarters of prepaid subs contraction. In our view, these trends align with CDB's current strategies, which include: (i) encouraging the migration of lower-end prepaid customers to postpaid plans, and (ii) promoting the adoption of convergence plans.

Stronger sequential blended ARPU. Meanwhile, 2QFY24 blended ARPU inched up sequentially to RM40 (1QFY24: RM39) as postpaid ARPU improved to RM65 (1QFY24: RM64), and prepaid ARPU remained stable at RM28. On the flipside, home fiber ARPU continued to dip QoQ to RM107 (1QFY24: RM112) in 2QFY24.

Revised EBIT guidance. CDB is ahead of schedule in its 3-year network integration and modernisation programme. Within a year, it has exceeded 50% of its targeted nationwide upgrades with over 8,500 sites modernised (as at end Jul-24). Additionally, CDB revised its FY24 EBIT guidance to single-digit decrease (from similar level in 2023). This was to account for a one-off charge amounting to c.RM139m for a voluntary separation scheme (VSS) for its employees in 1QFY24.

1. Forecasts. We tweak our FY24F and FY25F estimates lower by 11% and 13%, respectively, to reflect lower prepaid ARPU and subscriber churn.

Valuations. Our TP is lowered by 6% to RM5.59 (from RM5.97) based on unchanged 12.0x FY25F EV/EBITDA. This implies a 1x premium to the mobile players’ historical average of 11xto reflect post-merger synergies and economies of scale. CDB is on track to achieve its targeted FY24 gross synergy of RM700m, having achieved RM424m as at 1QFY24. 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 7.7% in FY24-25 implies capacity to pay steady dividends, and (iii) largest mobile subscriber base in Malaysia, translating to economies of scale. Maintain OUTPERFORM.

Risks to our call include: (i) slower-than-expected realization of merger synergies, (ii) slow monetization of 5G from Malaysian enterprises, and (iii) competition between mobile players turn irrational.

Source: Kenanga Research - 19 Aug 2024