KUALA LUMPUR (Sept 18): CGS-CIMB has raised its target price (TP) for CelcomDigi Bhd (CDB) to RM5.18, from RM5 prior, after the research house lifted its earnings forecasts for the financial year ending Dec 31, 2023 (FY2023) to FY2025.
In a note on Monday, the research house raised its profit estimates for CDB by 10.1% for FY2023, 6.6% for FY2024, and 6.5% for FY2025, following the second-quarter reporting season.
"CDB's cost management resulted in lower costs in various segments than we had previously expected. While we did tone down our revenue estimates (largely on lower average revenue per user projections), the cost adjustments more than made up for the impact of lower revenue estimates," it said.
CGS-CIMB lowered its merger-related cost estimates to account for the management's guidance, which was reiterated during the latest quarterly announcement.
"Our FY2023 core net profit estimate, however, is reduced by 9.3%, as we shift some of the merger costs initially captured as exceptional items to accelerated depreciation, which we have not stripped out of our core net profit estimates.
"These two instances are non-cash items. We make similar adjustments to our FY2024-25 estimates, but the impact of these on core net profit is smaller. Thus, our core net profit and core earnings per share (EPS) forecasts are increased, reflecting the earnings upgrades above," it said.
CGS-CIMB revised its core net profit estimates to RM1.25 billion for FY2023, RM1.84 billion for FY2024, and RM2.55 billion for FY2025.
Its EPS forecasts, meanwhile, were revised to 11 sen for FY2023, 16 sen for FY2024, and 21 sen for FY2025.
"We reiterate our 'add' call on CDB, with an increased TP of RM5.18 (RM5 previously), based on an unchanged 11.6 times FY2024 adjacent enterprise value/earnings before income tax, depreciation and amortisation, namely Digi's pre-merger trough valuations prior to the announcement in April 2021.
"We see improved earnings (FY2022-25 EPS compound annual growth rate of 24.4%) as the key rerating catalyst, with finalisation of the 5G network structure removing a key shroud over the overall sector."
CGS-CIMB, citing discussions with industry players, said the finalisation of 5G discussions could still be months away.
It continues to believe that CelcomDigi and Maxis Bhd will be the key drivers of the eventual dual networks, with CelcomDigi likely to operate the first network set up by Digital Nasional Bhd (Entity A).
"Note that, according to industry players we spoke to, all parties seeking to take an equity stake in a 5G network will have to initially take a stake in Entity A. Once entity A achieves 80% population coverage (currently at 69%), those interested to take a stake in the second network (Entity B) will sell their stakes to those remaining in Entity A. Participants in Entity B will rent capacity from Entity A until such a point that Entity B’s network achieves its coverage goals, which most players expect to take two years," it said.
Meanwhile, CDB's network and system integration is progressing with minimal disruptions, said CGS-CIMB, citing online telecommunications blogs.
"As per the company’s disclosures in mid-August, integration of about 40% of the 5,000 sites targeted for 2023 has been completed. Overall, the integration process will see the combined pre-merger 25,000 sites of the two networks streamlined to around 18,000 sites, with network capacity and coverage improved post integration, according to the company.
"We also note that Celcom’s website has incorporated some of the systems previously only available on DiGi, such as allowing customers to pick their preferred numbers when purchasing a new SIM, a positive sign of the back-end integration process. In our view, the merger brings together the network coverage of Celcom and the advanced back-end system of Digi to provide customers an improved overall experience.
CDB's net profit for the second quarter ended June 30, 2023 (2QFY2023) jumped 56.11% to RM343.52 million from RM220.04 million a year ago, as revenue doubled to RM3.12 billion from RM1.54 billion.
The telco declared a second interim dividend of 3.2 sen per share, amounting to RM375 million, with an entitlement date of Sept 6 and a payment date of Sept 29.
CDB attributed the revenue growth in 2QFY2023 to higher device sales, while its subscriber base grew by 3% with net additions of 599,000.
At the time of writing on Monday, the counter had declined by three sen or 0.68% to RM4.40 a share, giving it a market capitalisation of RM51.62 billion.