In line with CGS International’s (CGS) valuation basis for Maxis they rebased their target EV/EBITDA multiple for CelcomDigi Berhad (CDB) to 10.4x, from 11.4x previously.
This is based on a +1s.d. from its post-2020 EV/EBITDA mean vs. a post-2010 mean previously.
CGS believes that with the new operating paradigm post the Celcom-DiGi merger announcement in 2021, which essentially created a duopolistic market, has reduced investors’ growth expectations for the mobile segment.
Additionally, going forward, with growth in Malaysia’s overall economy improving and greater policy driving corporate and investor confidence, they believe the multiple premiums accorded to the mobile operators historically for their stability may be replaced by higher valuations or growth.
Within the sector, CGS’ preference remains with CDB as they see greater room for positive surprises as its integration progresses. Additionally, its FY25F/FY26F FCF yields of 5.8%/7.2% provide room for higher dividend yields as well.
Normalising merger expenses
CGS reduced their FY24F/FY25F core net profit estimates for CDB by 9.9%/2.2% as move its merger related expenses from “Exceptional” to operating costs.
Their headline FY24F/FY25F net profit estimates meanwhile are raised by 2.9%/2.9% following a review of their estimates post its 4Q23 results.
CGS also introduced their FY26 estimates.
Maintain Add call
CGS reiterated their Add call on CDB as they expect delivery of earnings expectations as well as greater clarity of Malaysia’s 5G dual network structure will be key catalysts for CDB’s shares over the next 12 months.
CGS’s TP declines to RM4.78 (previously RM5.18) as a result of a lower 10.4x FY25F EV/EBITDA target multiple as explained above.
At current levels, CDB’s shares trade at 9.6x FY25F EV/EBITDA, just below +0.5s.d. from its post2020 mean, with a 3.1% FY24F dividend yield, rising to 4.6% in FY25F.
Meanwhile, increased regulatory scrutiny on mobile operators’ service quality or other regulatory moves to curtail pricing are key downside risks.
Within the Malaysian mobile segment, CDB is CGS”S top pick. However, within the overall Malaysian telecoms sector, they prefer exposure via Telekom Malaysia and Axiata.
