• Maintain BUY, with new DCF-derived MYR4.35 TP from MYR4.55, 29% upside and c.4% FY25F yield. CelcomDigi’s results were broadly in line with the pressure on prepaid revenue likely behind it. The significant share price underperformance is reflective of the 5G quagmire, in our view, with valuation at -1.5SD from its historical EV/EBITDA mean. Stronger merger synergies are a key stock re-rating catalyst. A 6% ESG premium is reflected in our TP.

• In line. 3Q24 core earnings of MYR437m (-4.2% YoY) brought 9M24 core earnings to MYR1.22bn (+9% YoY), with 4Q being a typically stronger quarter. Sequential EBITDA strength (largely from cost efficiencies) was partially offset by higher tax expense (following tax rebates in 2Q24) with core earnings up 8% QoQ (-4.2% YoY). A third interim 3.6 sen DPS (payable on 23 Dec) puts YTD payout at 10.6 sen (DPR: 103%).

• Postpaid and home fibre gains; worst of prepaid slippage likely behind with sub adds having turned the corner. Service revenue (9M24: -0.6%/-0.2% QoQ) is tracking in line, albeit trailing Maxis (MAXIS MK, NEUTRAL, TP: MYR3.92) (9M24: +4%/-0.1% QoQ) where enterprise traction is stronger. Consumer postpaid growth came from higher subs (bundling and pre-to-post conversion) while lower subs (SIM consolidation) crimped prepaid revenue, down for the third quarter in a row. On the latter, CDB highlighted that subs and revenue have stabilised in recent months which suggests that the worst of the prepaid business may be behind it. Meanwhile, fibre home revenue sustained its double-digit growth trajectory with ARPU and subs at new highs. CDB also expects a ramp-up in enterprise growth in FY25F (multiple pilot trials ongoing on 5G use cases).

• Gross merger synergies of close to MYR1bn YTD (MYR1.1-1.2bn target for FY24F); lower synergies QoQ. YTD net synergies (excluding integration cost of MYR240m) amounted to MYR700m, with the bulk from capex avoidance (MYR670m). Management expects integration cost to peak this year which suggests that it should remain somewhat elevated in 4Q24 with most opex synergies back-loaded into FY25F-26F. With >10,500 sites modernised in 3Q24, CDB is on track to achieve the target of 75% completion by end-2024 (3Q24: ~70%).

• FY24F revenue guidance tempered with service revenue to register a flat to slight decrease (previously low single-digit increase) with a low single-digit EBIT decline (maintained) and capex/revenue at 15-18% (YTD: 13%). YTD 5G wholesale cost booked was c.MYR70m with incrementally higher spending in 4Q24. Our FY24F-26F core earnings are adjusted by +3.4%, +0.4% and +3.0%, mainly to reflect the 5G wholesale cost run-rate and latest guidance on synergies. Management has expectedly reserved comments on the recent 5G second network outcome, with several options being considered/explored.

• Key risks are weaker-than-expected merger synergies, competition and regulatory setbacks. 

Source: RHB Securities Research - 19 Nov 2024