Following the analyst briefing, we remain optimistic about CelcomDigi’s outlook, underpinned by its three-year post-merger transformation journey and resilient business model. Management guided that the group is on track to meet the synergy target. Meanwhile, the group has started to see more positive outcomes from the network integration. On the other hand, the group has recently submitted a proposal to bid for the second 5G network. Overall, we maintain a Buy call on CelcomDigi with an unchanged target price of RM4.58.

Core Business Remains Healthy

To recap, CelcomDigi’s 1HFY24 service revenue and EBITDA dropped 0.5% YoY and 8.3% YoY to RM5,384mn and RM2,743mn respectively. The slight decline in service revenue was mainly due to lower contributions from both postpaid and prepaid segments. Meanwhile, the EBITDA was hit by higher total costs, mainly attributed to the costs incurred from the voluntary separation scheme. On the other hand, the total subscriber base dropped to 20,223k from 20,466k in 2QFY24, largely due to lower prepaid subscribers. Management guided that the drop in the total subscriber base is not a major concern, as the group has observed a positive trend in customer additions recently.

Moving forward, management has guided the core business to remain resilient, and the total costs are likely to be lower in 2H2024. For FY24, management guided that i) service revenue should increase by a low single-digit growth rate, ii) EBIT might decrease by a single-digit rate due to internal restructuring expenses, and iii) CAPEX-to-total revenue ratio at around 15% to 18%.

Merger Integration Is on Track

Management also guided that the group was on track to meet the synergy target. To recap, the merger of Celcom and Digi is expected to realise net NPV synergies worth RM8.0bn – from network (RM5.5bn), IT (RM1.1bn), and others (RM1.4bn). In 1HFY24, the group successfully realised over RM700mn gross synergy, and it is expected to achieve at least another RM500.0mn in 2HFY24.

Based on management’s guidance, the network integration and upgrading are progressing ahead of schedule, with more than 50% of the targeted sites completed within a year. At this rate, the group aims to complete 75% of network upgrades by the end of 2024. Meanwhile, the management revealed that the group has started to see more positive outcomes from the network integration and modernisation, including improvements in signal quality, average speed, data traffic, monthly data consumption, and a reduction in customer complaints.

Bidding for the Second 5G Network

The group has recently submitted a proposal for the deployment of Malaysia’s second 5G network to the Malaysian Communications and Multimedia Commission. Management believes that CelcomDigi has a strong competitive edge in terms of infrastructure, financial strength, and technical expertise. According to Communications Minister Fahmi Fadzil, the outcome is likely to be announced within this year.

Impact

Maintain FY24 to FY26 earnings forecasts.

Valuation & Recommendation

No change to our target price of RM4.58, based on 11.0x EV/EBITDA CY25F EBITDA and a 3% ESG premium. Reiterate a Buy call on the stock. Key risks include unfavourable terms for 5G commercialisation, heightened price competition, and regulatory changes.

Source: TA Research - 20 Aug 2024