UOB Kay Hian: RM500m annual cost savings from Celcom-Digi merger


“We believe Digi will remain committed to paying out 100% of its net profits as dividends," says UOB Kay Hian Malaysia Research.

KUALA LUMPUR: UOB Kay Hian Malaysia Research expects the merger between Celcom and Digi to realise annual cost savings of RM500mil when it crystalises.

In its research note on Friday, it said a total of RM15bil to RM20bil of synergies were earmarked in the 2018 proposed Telenor Asia-Axiata merger, however the earlier merger did not go through. From that RM15bil to RM20bil amount, 50% would come off synergies from Malaysia (Celcom-Digi).

“We believe the savings will be lower this time around given no forced layoffs and fewer synergies from 5G capex investment.

“We have factored in RM500mil cost savings (annually) for Digi and the bulk of the savings will come from shared infrastructure (towers), utilities and to a certain extent, operations and maintenance costs, ” it said.

UOB Kay Hian Research has come to understand Digi has obtained all stakeholders’ approval on the Celcom-Digi merger and both Axiata and Telenor have completed the due diligence work.

It expects the signing of a definitive agreement by the end of this month. Assuming the deal goes through, the completion could take another seven to nine months.

Recall the proposed Axiata-Telenor merger back in 2018 was called off partly due to regulatory hurdles in Malaysia.

“This time, we believe the hurdles are minimal as the regulator is encouraging industry consolidation to achieve efficiency through greater scale and scope, as well as reduced market competition, ” it said.

In its report on Digi on Friday, it said to date, Digi has achieved 4G-LTE and LTE-A population coverage of 92% and 75% respectively.

This is supported by continuous efforts in fibre expansion of 10, 052km. An improved network quality will help boost Digi’s Internet revenue, which has increased from 70% of service revenue in 1Q20 to 75% in 1Q21.

Digi was ranked as the No.1 most consistent network by Ookla in 1Q21 and it aims to further invest to deliver good quality experience.

Digi also aims to widen its fibre footprint for capacity expansion in a bid to support 5G network densification requirements.

Digi continues to fiberise its base stations with over 80% of its sites fully/partly fiberised to date. All these would serve as a platform for Digi’s future 5G readiness.

UOB Kay Hian Research also pointed out Digi aims to grow its SME B2B market share via tailored digital solutions.

As Covid-19 accelerated demand for enterprises’ digitalisation, this will provide Digi with the opportunity to monetise enterprise solutions given enterprise plans and upselling efforts to existing enterprise customers.

Digi takes a more cautious stance vs its more aggressive peer when it comes to growing its formidable enterprise division.

The research house said Digi’s three-year roadmap is to drive sustainable earnings growth.

The growth strategy (2021-23) for Digi includes: a) maintaining a consistently good network in Malaysia, b) growing its postpaid and fixed broadband subscriber base by 20% (from 2020’s base), c) growing B2B revenue by 33% (from 2020’s base), and d) having a 100% touch free operation on the Digi network (from 2020: 74%).

This is expected to drive a sustainable business model for Digi.

“We believe Digi will remain committed to paying out 100% of its net profits as dividends, underpinned by: a) strong balance sheet with net-debt-to-EBITDA at 1.5 times, and b) good cost discipline with EBITDA margin firm at 49%.

“These translate into net dividend yields of 3.5% and 4.1% respectively for 2021-23.

“Maintain hold with an unchanged DCF-based target price of RM4.15 (discount rate: 7.2%, terminal growth: 2%).

“Our target prices reflect an expected merger synergy of RM500mil (from opex and capex savings).

“At our target price, the stock will trade at 12.6 times 2021F EV/EBITDA (1SD above its five-year mean valuation of EV/EBITDA of 11.7 times), which we believe has fairly factored in the merger synergies, at least to the tune of RM500mil annually, ” UOB Kay Hian Research pointed out.

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