TELECOMMUNICATION

Sector report Catalysts from Celcom-Digi merger

9 April 2021 OVERWEIGHT
Alex Goh (Maintained)
alexgoh@ambankgroup.com
03-2036 2280 Rationale for report: Sector update

Investment Highlights

 Merger at last. As we have been continuously highlighting since August last year, the sector consolidation process has
finally reignited with Axiata and Telenor Asia in advanced discussions to merge the telco operations of Celcom Axiata
(Celcom) and Digi.Com.

 Digi likely to acquire Celcom Axiata. While the swap arrangements are still being negotiated, we understand from
Telenor’s teleconference yesterday that this could involve Digi acquiring Axiata’s wholly-owned Celcom via a share swap
together with a cash equalisation sum of RM2bil, of which RM1.7bil will come from new Digi debt and RM300mil from
Telenor. Both Axiata and Telenor will have equal stakes of 33.1% each in the merged entity which will be called Celcom
Digi, with the balance held by Digi’s minority shareholders.

 Emergence of a new celco leader. Celcom Digi will emerge as the leading telecommunications service provider in
Malaysia in terms of market capitalisation, revenue and profit, with proforma FY20 revenue of RM12.4bil, pre-synergy
EBITDA of RM5.7bil and 19mil customers, 71% above Maxis, the current market leader (Exhibit 4). Even so, the parties
highlighted that this development will not lead to the market being dominated by a single party, which we understand is a
concern for the Malaysian Communications and Multimedia Commission.

 Reassurance of local control. As Axiata together with Malaysian institutional funds will own over 51% of Celcom Digi, the
proposed merger will not have any problems in meeting the country’s foreign shareholding threshold. Also, Axiata clearly
will have the larger influence with Celcom Digi’s chairman position to be occupied by Axiata’s current CEO Datuk Izzaddin
Idris while Celcom’s current CEO Idham Nawawi will assume the same role in the merged entity, providing reassurance of
continued local control. Meanwhile, Telenor will hold the vice-chairman role via Jørgen C. Arentz Rostrup with Albern Murty
as deputy CEO.

 Aiming for synergies amid dual branding strategy. While the parties have committed to no forced layoff of staff, voluntary
separation schemes and retraining programmes may be introduced. Hence, the merged entity is still expected to generate
synergies from cost optimisation, re-engineering network operations, reduced redundancies and procurement
rationalisation. Additionally, the merger aims to catalyse revenue growth from dual brand strategy, integrating operations,
digitalisation and coordinate on home fibre convergence play. The enlarged scale of operations will also provide additional
financial flexibility for future capex rollouts.

The company has not provided any guidance on the synergistic value creation vs. the net present value of RM7–9bil over
5 years for the Malaysian operations during the previous abortive merger attempt back in 2019. This was the larger part of
the 5-year synergies up to RM15–20bil in present value from network efficiencies, cost avoidance, procurement optimisation
and economies of scale arising from merging the regional operations of Axiata and Telenor.

Assuming a 10% reduction in opex and capex for the combined entity, we estimate potential savings of RM4.3bil over 5
years, which translates to 10% of Celcom Digi’s potential market capitalisation of RM41bil. This is based on Digi’s current
share price which has been adjusted for the RM1.7bil cash outflow.

 Deal looks better for Digi. Assuming no synergies from the merger, we estimate that Digi’s FY22F EPS will increase by
5% while Axiata will decrease by 10% as Digi’s equity appears to be valued 67% above Celcom’s from the share and cash
exchange. Hence, we view that the merger appears to favour Digi more than Axiata. Notwithstanding the potential EPS
dilution, Axiata maintains its FY24F target to reach a net profit of RM1.8bil (+2.1x vs FY20) and DPS of 20 sen (2.9x vs
FY20), partially from the expected synergies generated from the merger.

We estimate that Celcom Digi’s FY22F net debt/EBITDA will rise from 1x to 1.4x, which remains comfortable for a telco
business. For Axiata, this will substantively drop from 1.1x to 0.9x due to the deconsolidation of Celcom’s debt and cash
receipt of RM2bil. Hence, we are positive on this development for both Digi and Axiata.
 Telecommunication Sector 9 April 2021

 Fast tracking process. The parties aim to reach a definitive agreement over the next 2 months. If approvals have been
secured by the regulators and shareholders, the proposed merger should be completed within 9 months. This appears to be
an ambitious time line as Axiata hopes to avoid losing market share during the merger process to its rivals. As the brands of
both Celcom and Digi will be maintained, the company does not expect to surrender any of the spectrums presently held by
both companies.

 Maintain OVERWEIGHT on the sector with BUY calls for TM, which has shown significant cost improvements together with
more compelling dividend yields, and Axiata, which offers bargain EV/EBITDA valuations with multiple opportunities for
monetisation as the group aims for higher dividend payout policies. These valuations are even more compelling given their
ESG scoring of 3–4-stars. While retaining our HOLD call on Digi for now, we expect to upgrade to a BUY should the parties
complete the value-accretive agreement. Maxis remains a HOLD given that the consolidation of its nearest rivals will erode
its current pole position.

EXHIBIT 1: VALUATION MATRIX

Source: AmInvestment Bank

EXHIBIT 2: MERGER BREAKDOWN

FY20 (RM mil) Digi Celcom Merged entity
Revenue 6,152.7 6,219.0 12,371.7
Opex (3,126.2) (3,629.0) (6,755.2)
EBITDA 3,026.6 2,590.0 5,616.6
Normalised net profit 1,221.0 889.0 2,110.0

No of shares (mil) 7,775.0 n/a n/a

Share price (RM/share) 3.75 n/a n/a
Market cap (RM bil) 29.2 n/a n/a
Net debt as at 31 Dec 2020 (RM bil) 5.1 3.3 8.4
Enterprise value (RM bil) 34.3 n/a n/a

EV/EBITDA (x) 11.3 n/a n/a

Net debt/EBITDA (x) 1.7 1.3 1.5

Postpaid subscribers 3.0 3.0 6.1

Prepaid subscibers 7.4 5.6 13.0
Mobile subscribers 10.4 8.7 19.1

4Q20 Postpaid ARPU (RM/month) 66 84 75.0

4Q20 Prepaid ARPU (RM/month) 32 30 31.1
4Q20 Blended ARPU (RM/month) 42 46 43.8

FY20 Capex (RM mil) 773.0 984.0 1,757.0

Source: AmInvestment Bank

AmInvestment Bank Bhd 2

Telecommunication Sector 9 April 2021

EXHIBIT 3: SHAREHOLDING CHANGES

Source: Axiata

EXHIBIT 4: MARKET POSITION

Source: Axiata

AmInvestment Bank Bhd 3

Telecommunication Sector 9 April 2021

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