Published on 11 Nov 2022.
RAM Ratings has reaffirmed the respective AAA/Stable and P1 ratings of Digi Telecommunications Sdn Bhd’s (Digitel or the Company) RM5 bil Islamic Medium-Term Notes Programme (2017/2032) and RM1 bil Islamic Commercial Papers (2017/2024). The facilities are subject to a combined limit of RM5 bil. The ratings reflect Digitel’s well-established position in the mobile services industry, superior profitability and continued strong cashflow.
This position is further entrenched by a rating uplift from its strong operational and financial interlinkage and very close relationship with Telenor ASA (at present), and Celcom Digi Berhad (MergeCo), should the merger conclude. The resultant combined entity post-merger will emerge as the largest telco company in the country from subscriber, revenue and earnings perspective.
As with any merger, there is always the risk of falling short of the targeted synergies if not executed well. As the merger is a complex effort, effective planning, execution and tracking across business processes and strategies are critical in ensuring synergy targets are delivered on time. From a leverage and debt coverage perspective, MergeCo’s consolidated financial metrics will fall below the AAA-thresholds with tighter rating headroom in the next two years. However, we note that MergeCo has financial flexibility to deleverage and de-risk its balance sheet through a more prudent dividend policy. Notwithstanding concerns around integration and execution risks, the merger could provide the foundation for a stronger business position and improved structural earnings in the longer run. Barring any unforeseen circumstances, the merger is expected to be completed by early December 2022.
In the immediate term, increased consolidated cashflows and earnings will be offset by merger-related expenses. If targeted synergy benefits can be fully realised, this situation is expected to reverse once we observe steady progress toward post-merger integration, supported by improvements in earnings, market position and competitive standing.
On a stand-alone basis, while Digitel’s subscriber market share saw some slippage since the onset of the pandemic, Digitel’s OPBDIT margin remains the widest in the mobile industry (1H FY Dec 2022: 48.1%). Having recorded the second largest OPBDIT and subscriber base in fiscal 2021, the Company maintained this position through the first half of this year.
Figures 1 & 2: Digitel’s subscriber mix shifting towards postpaid
Digitel’s total adjusted debt load reduced to RM4.8 bil as at end-September 2022, resulting in a marginally improved debt to OPBDIT ratio of 1.61 times y-o-y. FFODC also received a boost, coming in at 0.60 times (FY Dec 2021: 0.58 times), slightly better than we had expected.
The long-term and broader market challenge for Digitel (and MergeCo) will depend on 5G monetisation as the rollout continues for Digital Nasional Berhad (DNB, Malaysia’s single wholesale 5G network operator). Both Celcom and Digitel have individually executed 10-year 5G access agreement arrangements with DNB and have reached consensus to take up equity in DNB.
We will evaluate the impact of the merger exercise and continue to monitor the developments as more details on the integration emerge. RAM will reassess the ratings of the Company’s facilities as more information becomes available.
Davinder Kaur Gill
(603) 3385 2525
Ho Chian Leng
(603) 3385 2527
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Ratings on DiGi Telecommunications Sdn Bhd