CDB: Investment Bank Revises Outlook, Downgrades Rating Amid Revised Synergy Expectations

RHB Investment Bank has recalibrated its outlook on CelcomDigi (CDB MK), resulting in a downgrade of the stock from its previous “Buy” rating to “Neutral.” This re-evaluation introduces a new DCF-based target price of MYR3.95, a reduction from the prior MYR4.20, offering a potential 9% upside from its last traded price of MYR3.64, alongside an estimated 4% FY25F yield. The adjustment primarily stems from a revised assessment of integration synergy expectations and anticipated delays in crucial IT investments.

The investment bank now posits that its earlier assumptions regarding significant integration synergies might have been overly optimistic. A key factor in this revised outlook is the projected delay in IT investments, with the peak now expected in FY26F, shifting from the initial forecast of 4Q25/1Q26. This prolonged timeline for IT integration, described as complex and involving over 100 IT and support sub-systems, has led RHB to trim its earnings forecasts for FY25-27F by 2.4%, 8.6%, and 8.5% respectively. The revision follows an adjustment of potential operational expenditure and capital expenditure synergy assumptions. Furthermore, competitive pressures and the risk of weaker-than-expected synergies are highlighted as significant downside risks.

Operational Challenges and Integration Progress

CelcomDigi is actively exploring the decommissioning of an additional 10% of its remote sites. This initiative is beyond the initial integration target of approximately 17,000 combined sites from a pre-merger base of 24,000, with a decision on this cost-benefit study anticipated by end-2025. While the overall network integration remains on schedule for completion by end-2025, IT investments, which commenced in late FY23, are proving more intricate than expected. These investments are now projected to extend well into FY26F, potentially spilling over into FY27F. The company reported integration costs of MYR91 million in 1H25, and management guidance indicates full-year integration costs of MYR317 million, suggesting a ramp-up in spending during 2H25 from related IT investments.

Regulatory Landscape and Future Outlook

Discussions with regulatory authorities concerning the expanded Sales & Service Tax (SST), which took effect on July 1, are reported to be moving in a positive direction. However, RHB still foresees a potential downside to the company’s prior guidance of a MYR100 million worst-case impact from the SST. Regarding Digital Nasional Berhad (DNB), talks involving DNB and the Finance Ministry are ongoing, with management maintaining a tight lip on potential outcomes. An optimal resolution is believed to hinge on securing access to 5G spectrum, facilitating infrastructure sharing, and implementing revisions to the 5G wholesale framework. An extension of the November deadline for the exercise of the put-and-call options by the MOF and MNOs is considered a possibility due to the complexity of ongoing discussions. Despite planned IT upgrades and the decommissioning of additional sites, CelcomDigi expects capital expenditure to decline year-on-year from FY26F, as a substantial portion of integration capex has already been incurred over the past two years. The company’s focus remains on driving greater operational efficiencies.