OTT Cannibalization And Mounting Debt Will Weaken Long-Term Prospects

Key Takeaways

• Cannibalization from digital platforms, regulatory constraints, and industry commoditization threaten legacy revenues and undermine long-term growth and profitability.
  
• Elevated debt, slow post-merger integration, and operational inefficiencies increase cost pressures and constrain financial flexibility and earnings potential.
  
• Strategic growth in high-value segments, operational efficiencies, and digital expansion position the company for enhanced profitability and increased market share.

Catalysts

An investment holding company, provides mobile communication services and related products in Malaysia.

• The accelerating adoption of over-the-top communication platforms such as WhatsApp and Zoom continues to cannibalize traditional voice and SMS revenues, threatening Celcomdigi's legacy income streams and placing long-term pressure on topline growth.
  
• Increasing regulatory scrutiny regarding data privacy and digital sovereignty is driving up compliance costs and may limit the company's ability to monetize user data and digital services, negatively impacting both net margins and future earnings potential.
  
• High post-merger leverage and elevated debt levels are likely to constrain financial flexibility, resulting in higher interest expenses and reducing the company's net profit margins and reinvestment capacity over time.
  
• The complexity and slow pace of network and IT integration, with more than 30 critical systems still to be merged, increases the risk of prolonged operating cost inefficiencies and delays in achieving targeted run rate savings, weighing on EBITDA margins through and potentially beyond 2027.
  
• The ongoing commoditization of mobile connectivity and intensifying competitive pressures from regional incumbents and new entrants are likely to drive persistent average revenue per user decline, directly undermining long-term revenue growth and profitability for Celcomdigi.

Celcomdigi Berhad Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Celcomdigi Berhad compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Celcomdigi Berhad's revenue will decrease by 0.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 10.8% today to 15.3% in 3 years time.
• The bearish analysts expect earnings to reach MYR 1.9 billion (and earnings per share of MYR 0.13) by about August 2028, up from MYR 1.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 23.3x on those 2028 earnings, down from 31.9x today. This future PE is lower than the current PE for the MY Wireless Telecom industry at 23.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.45%, as per the Simply Wall St company report.

Celcomdigi Berhad Future Earnings Per Share Growth

Risks

• CelcomDigi's steady growth in strategic segments such as postpaid, convergence, and enterprise services may drive long-term increases in revenue as these segments typically have higher average revenue per user and greater retention.
  
• Ongoing network modernization and successful completion of IT integration projects could elevate customer experience and operational efficiency, supporting improvements in net margins and reducing long-term operating expenses.
  
• The company is on track to realize significant merger synergies, targeting between MYR 700 million and MYR 800 million in annual run rate savings after 2027, which may substantially enhance EBITDA and support earnings growth.
  
• Expansion of modernized and branded retail channels and a focus on delivering digital products and value-added services to 20 million subscribers may increase CelcomDigi's market share, directly benefiting topline revenue.
  
• Strong emphasis on operational excellence and cost management, with ongoing reductions in operating expenses since the merger, may help sustain or improve profit margins even in a competitive environment.

Valuation

• The assumed bearish price target for Celcomdigi Berhad is MYR3.03, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Celcomdigi Berhad's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of MYR5.6, and the most bearish reporting a price target of just MYR3.03.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be MYR12.7 billion, earnings will come to MYR1.9 billion, and it would be trading on a PE ratio of 23.3x, assuming you use a discount rate of 8.5%.
• Given the current share price of MYR3.77, the bearish analyst price target of MYR3.03 is 24.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.