• U/G to BUY from Neutral, with new MYR4.55 TP (DCF) from MYR4.35, 26% upside, c.4% yield. We believe the renewed sell down on CelcomDigi presents an attractive entry point with valuation at 2SD below historical EV/EBITDA mean. A stronger re-rating could stem from the closure of the second 5G network quagmire and greater synergies booked in FY25F. Our TP includes a 6% ESG premium.

• Key takeaways from the post 2Q/1H24 results call:
  i) Lower merger synergies in 2H24. Opex synergies backloaded as integration cost should taper off in FY25F. While gross synergy topped the initial MYR700m guided in 1H24, it moderated QoQ. Of the 1H24 net synergy of MYR454m booked, MYR367m relates to capex avoidance while the remainder is on opex (MYR87m). Gross synergy is guided to be lower HoH in 2H24 to c.MYR532m. With integration cost expected to remain elevated in 2H24 (MYR252m), net synergy should come in lower at MYR280m. This could also explain the lowered EBIT guidance for the year with some timing effects at play, in our view. The cumulative synergy to-date has been on capex avoidance (81%) vs opex (19%). This suggests the impact on profit and loss should be backloaded (into FY25F) with greater opex savings, including savings in staff cost (MYR80-90 pa) from the earlier VSS;
  ii) Network integration trending ahead (>50% of sites). CDB has modernised more than 8,500 sites to-date with more than 3,500 sites decommissioned – on track to meet the target of 75% modernised/integrated sites by end-2024,
  iii) Device subsidy increased with focus on acquiring quality subs. It is seeing some positive traction from the recent refresh of its prepaid offerings. CDB’s prepaid subs base has contracted for three quarters in a row,
  iv) 5G wholesale cost is set to rise further in 2H24/FY25F. CDB booked MYR37m in 5G cost in 1H24, relative to the nominal MYR4m in 1H23. We expect this to rise further in 2H24/FY25F on the back of higher 5G traffic,
  v) Strong 5G bid submitted. Management is of the view that it has submitted a very strong bid for the second 5G network. The strong track record of network rollout (most sites are 5G ready) is a key merit. CDB is open to collaborating with other MNOs if it secures the spectrum.

• Forecast adjustments. We raise FY25F and FY26 earnings by 14% and 11% after factoring in larger (backloaded) synergies, partially mitigated by higher 5G wholesale costs. FY24F numbers have been largely maintained.

• Key risks: Lower-than-expected merger synergies, competition, and regulatory setbacks. CDB has the highest ESG rating among its peers based on our proprietary scoring methodology. Prior to the 2022 merger, Digi was the first among peers to publish an independent sustainability report in 2009.

Source: RHB Research - 20 Aug 2024