Is Celcomdigi Berhad Undervalued? A DCF and Dividend Deep Dive

The Malaysian telecommunications giant Celcomdigi Berhad (CDB:KLSE) is currently trading at a significant discount to its intrinsic value, according to discounted cash flow (DCF) analysis. With its shares priced at RM3.87 as of July 14, 2025—a 44% discount to a DCF-derived fair value of RM6.83—and offering a 3.83% dividend yield, the stock presents an intriguing opportunity. However, investors must weigh this undervaluation against risks such as high leverage and unsustainable dividend payout ratios. Let's dissect the numbers to determine if CDB is a buy ahead of its earnings report on July 18, 2025.

The Case for Undervaluation: DCF and Free Cash Flow

The DCF analysis suggests CDB's shares are deeply undervalued. A fair value of RM6.83 implies the stock is 44% below its intrinsic worth, based on assumptions about its future cash flows and a discount rate reflective of its risk profile. This valuation is further bolstered by the company's robust free cash flow of RM1.68 billion, which underpins its ability to generate returns and fund dividends.

While skeptics might question the DCF assumptions, CDB's dominance in Malaysia's telecom market and its pivot toward digital services (e.g., 5G infrastructure, cloud solutions) justify a positive outlook. The company's P/E ratio of 32.1x appears high, but this reflects its growth trajectory rather than overvaluation. In a sector where competitors like Axiata and Maxis trade at lower multiples, CDB's premium may signal investor confidence in its strategic moves.

Dividend Yield: A Double-Edged Sword

CDB's 3.83% dividend yield stands out in a market where many telecom stocks offer sub-3% payouts. However, the 121% payout ratio raises concerns about sustainability. The company paid out more in dividends than it earned in net income over the past year, which could strain its balance sheet if earnings growth falters.

Investors must ask: Can CDB maintain this dividend without compromising growth? The answer hinges on its ability to deleverage. CDB's debt-to-equity ratio of 0.83 is manageable in a low-interest-rate environment but poses risks if borrowing costs rise. Its RM1.68 billion free cash flow, however, provides a buffer to service debt and fund dividends while reinvesting in growth.

Risks to Consider

1. High Leverage: Rising interest rates or economic slowdowns could pressure CDB's debt servicing costs.
2. Dividend Sustainability: A payout ratio above 100% suggests dividends may need trimming unless earnings grow.
3. Market Competition: Intense rivalry in Malaysia's telecom sector could squeeze margins.

Why the Discount Might Fade

The upcoming earnings report on July 18, 2025, could be a catalyst. If CDB delivers strong free cash flow growth or reduces leverage, the stock could rally toward its DCF target. Additionally, its beta of 0.25 indicates lower volatility than the market, making it a defensive play in uncertain times.

Investment Thesis

CDB's RM3.87 price offers a margin of safety for long-term investors willing to overlook short-term risks. The 44% upside to the DCF valuation and 3.83% yield create a compelling risk-reward trade-off, especially with earnings looming. While deleveraging and dividend sustainability are priorities, CDB's cash flow resilience and growth in digital services position it to outperform peers over the next 12–18 months.

Final Take

Celcomdigi Berhad is a prime example of a value trap turned opportunity, provided its management executes on debt reduction and growth initiatives. For income-focused investors, the dividend yield offers near-term returns, while the DCF gap suggests substantial upside if the stock corrects toward fair value. Consider a gradual entry ahead of July 18's earnings, with a stop-loss below the 52-week low of RM3.25.

Actionable Insight: Buy CDB at current levels, target RM6.83 by year-end, and monitor the July 18 earnings report for catalysts.

Data as of July 14, 2025. Past performance is not indicative of future results.