CDB: Integration Efforts on Track, But Near-Term Headwinds Prompt Target Price Revision
| Investment Bank | PHILLIPCAPITAL |
|---|---|
| TP (Target Price) | RM3.47 (-5.2%) |
| Last Traded | RM3.23 |
| Recommendation | HOLD |
A recent research report from PhillipCapital indicates that a leading telecoms group is making steady progress on its ambitious network and IT integration targets. However, the near-term financial outlook suggests a dip in performance, leading the investment bank to reaffirm its “HOLD” rating but revise its 12-month target price downwards, reflecting anticipated challenges and increased risk premiums.
Performance Review and 4Q25 Outlook
The company is projected to record a lower year-on-year core net profit of RM365-370 million for the fourth quarter of 2025. This expected decline is primarily attributed to the absence of a Green Tax incentive in the quarter, coupled with a fiercely competitive pricing environment in the market. Average Revenue Per User (ARPU) trends remain subdued, with prepaid ARPU holding steady at RM28 and postpaid ARPU easing to RM62 in 3Q25, which limits immediate upside potential. Despite these headwinds, the home fibre segment is anticipated to deliver double-digit revenue growth, bolstered by ongoing convergence strategies and bundling initiatives.
Operational Synergies and Integration Progress
Operational integration initiatives are largely on schedule. Network modernisation stands at approximately 90% completion, with IT consolidation exceeding 80%, keeping the group on track for full completion by 2026. Management reiterated that merger synergies continue to meet their targets, primarily driven by operating expense efficiencies. These savings include additional contributions from site rental, energy optimisation, backhaul rationalisation, and operating model improvements. The group has reaffirmed its target of annualised operating expenses savings of RM700-800 million by 2028.
The company is strategically focusing on attracting and retaining high-quality subscribers, leveraging its 20.5 million subscriber base to drive sustainable growth. While overall ARPU across segments remains subdued, Average Revenue Per Account (ARPA) saw a 7% year-on-year increase, supported by successful prepaid-to-postpaid migration and the uptake of convergence plans like Celcom Digi One, which has boosted ARPA and family plan adoption.
Future Growth Drivers and Challenges
Looking ahead, greater clarity on the Digital Nasional Bhd (DNB) ownership structure is expected by the first half of 2026, which could further enhance operational efficiency and support sustainable growth. For 2025, the company has guided for low single-digit service revenue growth and low-to-mid single-digit EBIT growth, with capital expenditure intensity projected between 14-16%. PhillipCapital forecasts the company’s revenue to remain broadly flat year-on-year in 2025, with modest recoveries of 1.5% in 2026E and 2.5% in 2027E, underpinned by a steady increase in subscriber numbers and improved operational efficiency. Core net profit growth is expected to be between 2.8-9.5% over 2025E-2027E.
However, the competitive pricing landscape continues to limit near-term ARPU expansion. The report highlights potential execution risks associated with the 5G rollout and uncertainties stemming from the company’s 33% stake acquisition in DNB following the Ministry of Finance’s exit. These factors led to a higher risk premium being incorporated into the valuation model.
Analyst’s Recommendation
PhillipCapital maintains its HOLD recommendation, revising the 12-month target price to RM3.47 from the previous RM3.66. The revision incorporates a higher risk premium, with the Weighted Average Cost of Capital (WACC) assumption raised to 8.5% from 8.2%. The firm acknowledges the company’s market leadership and the potential for value creation from post-merger synergies, supported by ongoing integration and disciplined cost management. However, caution persists regarding the limited near-term ARPU expansion in a competitive market and slower-than-expected progress in 5G monetization.
Key upside risks to the HOLD rating include a stronger-than-expected recovery in ARPU, improved margins from merger synergies, and a smoother-than-expected path to 5G monetization. Conversely, downside risks include intensified competition leading to margin compression, weaker earnings delivery, slower synergy realisation, and subdued consumer spending.
