Rating action       

MARC Ratings has upgraded its rating on Celcom Networks Sdn Bhd’s (CNSB) Sukuk Murabahah Programme of RM5.0 billion to AAA_IS from AA+IS. The rating outlook is stable. The outstanding under the programme stood at RM1.15 billion as at end-June 2023.       

Rationale       

The rating action follows from MARC Ratings’ assessment that the merger between CNSB’s parent Celcom Berhad (Celcom) and Digi.Com Berhad to form CelcomDigi Berhad has proceeded with minimal hitches to group operations, alleviating concerns on integration and execution risks. The rating agency had highlighted in previous reviews that the merger would be viewed positively in CNSB’s rating pending assessment on key factors including CNSB’s strategic role and the direction of the enlarged entity post-merger. CNSB provided network telecommunication services to the then Celcom group and its rating had been anchored on the overall credit profile of the group, premised mainly on the significant operational and financial linkages between them.     

The rating upgrade incorporates the continued significant role of CNSB in the merged entity and the stronger credit profile of CelcomDigi. The merger has fortified CelcomDigi’s market position as the largest telco in Malaysia by subscriber base, with a commanding share of the mobile market at 42% and a combined customer footprint of around 20.5 million. MARC Ratings views that there are additional synergies to be gained from the merger that would strengthen CelcomDigi’s operations and foothold in the market. Coupled with ongoing improvements in its network quality and coverage, as well as the gradual rollout of its 5G services, the group is positioned for top line growth.       

Financial performance, as expected, was better in 1HFY2023. For meaningful comparison, assuming the merger took place in January 2022, 1HFY2023’s revenue improved 3% y-o-y to RM6.3 billion (1HFY2021: RM6.1 billion), supported by increased subscriptions and higher device sales. Post-merger earnings before interest, tax, and depreciation (EBITDA) margin had also widened to 48% from 44% a year ago, underpinned by the improved top line.        

CelcomDigi’s bottom line, however, was weighed by accelerated depreciation stemming from the revision of assets’ useful life and site rationalisation relating to the 5,000 sites it plans to consolidate in 2023. With 3,000 sites still to be consolidated by year end, it is expected that depreciation and amortisation charges will remain elevated, potentially impacting profitability in the near term. Over the longer term, we believe the merged entity should benefit from synergies, economies of scale and scope of business.      

CelcomDigi’s liquidity profile is characterised by its robust cash flow from operations (CFO) and ample cash balances. The company generated CFO of RM2.6 billion in 1H2023 to comfortably cover capex (RM360 million) and shareholders’ returns (RM746 million) by 7.2x and 3.5x. CFO is expected to improve in tandem with profitability.        

The merger, however, led to a higher debt balance, which stood at about RM7.4 billion as at end-June 2023. Although leverage is higher following the merger, we believe the company will be able to deleverage, supported by revenue and EBITDA margin growth, as well as its sizeable cash flow generation. We note that debt as at end-2022 (pro forma) was RM8.9 billion.      

Overall, we view the merger favourably as it positions CelcomDigi as the country’s largest telco with robust growth opportunities. We also believe that industry consolidation will support long-term price stability and profitability. Competition in mobile tariffs remained intense in 2022, with the challenging business environment driving tactical pricing strategies to preserve market share.    

Regarding CelcomDigi’s participation in the country’s 5G rollout, both Celcom and Digi have terminated their share subscription agreements with Digital Nasional Berhad (DNB). This comes after the government announced that it will transition towards a Dual Network approach. We understand CelcomDigi has plans to play a more active and direct role in the country’s 5G rollout.       

Rating outlook

The stable outlook reflects the team’s expectation that CelcomDigi will maintain its market position and financial performance, as well as continue with its prudent capex programme and dividend distribution policy. 

Any significant weakening in credit profile arising from, inter alia, loss of market share, lower average revenue per user (ARPU), sharp increases in borrowings and/or aggressive dividend distribution, could pressure the rating and/or outlook.