Analyst Comments on Digi 3Q16 Performance

Digi reported its Third Quarter 2016 (3Q16) financial results on Wednesday. The Telco now has a subscriber base of 12.25 million.

TA Securities:

  • Digi reported a 9MFY16 net profit of RM1,258mn (+4.2% QoQ, -6.1% YoY). This was within ours and consensus expectations at 76.5% and 74.7%. A third interim dividend of 5.6sen was declared, bringing YTD dividends to 16.1sen (-5.8% YoY).
  • A sequential improvement in margins were driven by lower traffic charges (-12.5% QoQ), as a decision was taken to stray away from irrational IDD price war. Service revenue stood flat. A 3.7% QoQ drop in prepaid voice revenue (partly due to IDD) was offset by higher internet revenue (+5.9% QoQ). Postpaid subscribers gained net adds for the 10th consecutive quarter, but ARPU (-2.4% QoQ) fell on acquisitions of lower priced entry level postpaid plans.
  • For the 9MFY16, service revenue decreased 1.9% YoY to RM4.7bn. Despite a larger prepaid subscriber base (+356k net adds), the decline was attributed to a fall in prepaid ARPU to RM34 (-10.5% YoY) – caused by price competition. Due to its strong migrant base, we believe the group was particularly impacted by the irrational IDD price war. Prepaid voice revenue fell 9.5% YoY. It has since shifted its focus on more sustainable growth and driving internet revenue.
  • The postpaid segment fared better, with revenue increasing 9.1% YoY. It continued to gain market share with YoY net adds of 218k subscribers. Postpaid ARPU, however, fell slightly to RM80 (-1.2% YoY). In an effort to simplify offerings, it has recently consolidated its postpaid packages. However, signifying continued competitive pressures, its new Digi Postpaid 80 plan offers consumers an increased 20GB data at RM80/month.
  • In terms of costs, operations and maintenance costs increased 27.1% YoY due to network expansion activities. Partly offsetting this, traffic charges trended lower by 4.9% YoY. This was attributed to a weaker ringgit and lower IDD traffic. EBITDA margins improved 1.0pp to 44.9%.
  • In light of its YTD performance, service revenue was revised to a low single digit decline (previously sustain at 2015 levels). EBITDA margin is estimated to be slightly below 45%. Meanwhile, capex was guided at 13% of revenue. Competitive pressures will continue to be a key challenge for both the postpaid and prepaid segment. TM’s mobility arm, webe, has started its nationwide rollout since 30th September 2016. Additionally, we do not expect a significant rebound in prepaid ARPUs amid weak macroeconomic conditions.
  • The group has been allocated 2x5MHz and 2x20MHz in the 900MHz and 1800MHz spectrum band. Increased exposure to lower band spectrum implies better indoor coverage and potential capex savings. Pricing will be split into a one-off fee component of RM598.5m, with annual maintenance fees of RM51.5mn. Already imputed into our model, we estimate FY17 and FY18 earnings will be reduced by 1.8% and 2.5%. Leverage, however, should remain comfortable with estimated Net debt/EBITDA at 0.6x.
  • We value Digi at a an unchanged TP of RM4.95/share – based on a DCF valuation with WACC at 7.7% and long term growth rate of 1.0%. Sustained competitive pressures within the industry remain our key concern for the stock, as we project flattish earnings growth. We believe the stock is fairly valued at current levels, trading slightly above its historical average forward EV/EBITDA at 13.4x. SELL.

JF Apex Securities:

  • 3Q16 net income improved after rising 10.3% YoY and 4% QoQ to RM438m due to higher margins following lower IDD margins and stronger internet revenue. The higher earnings came despite quarterly revenue declined 3.3% YoY and 2.2% QoQ to RM1.62bn.
  • Below forecast – Nine-month revenue of RM4.93bn came below forecast after achieving 69% of our full year forecast while net profit of RM1.26bn was within estimate after making up 72.6% of FY16 estimate.
  • Flat service revenue QoQ – 3Q16 prepaid revenue was unchanged QoQ but declined 6.7% YoY to RM1.07bn. Postpaid revenue was 0.6% QoQ lower but increased 10.4% YoY to RM489m.
  • YoY subscriber growth but QoQ decline – In 3Q16, total subscribers increased 23.7% YoY but declined 0.8% QoQ to 12.25m, after prepaid subscribers dropped 12.2% YoY and 1.3% QoQ to 10.26m while postpaid subscribers increased 12.3% YoY and 2% QoQ to 1.99m.
  • Resilient ARPU – Amid the competitive environment, DiGi’s blended ARPU for 3Q16 was slightly lower at RM4 (vs RM42 in 2Q16) as prepaid ARPU was unchanged at RM34 while postpaid ARPU declined to RM80 (vs RM82 in 2Q16).
  • Steady operating cash flow – 3Q16 operating cash flow increased slightly to RM573m (vs RM568m in 2Q16) as capex increased to RM202m (vs RM167m in 2Q16). Cash reserves decreased to RM331m (vs RM366m in 2Q16) as interest-bearing debts remain flat at RM1.46bn. As a result, net debt/EBITDA was unchanged at 0.4x.
  • Spectrum payment decision – On the upfront fee for the 900MHz and 1800 MHz spectra, management will decide by 1st Nov on whether to pay a lump sum or by installment. To recap, Digi has to pay RM598.5m of upfront fee and annual fees of RM51.5m for 15 years beginning 1 July 2017.
  • Third interim dividend – DiGi declared its third interim dividend of 5.6 sen/share, taking total dividend so far to 16.1 sen/share. We expect full year dividend of 22 sen, which translates into a yield of 4.4%.
  • Slightly lower dividend forecast – Following the anticipated spectrum payment, we are reducing payout rate forecast to 95% from 99%. This translates into full year dividend of 21.5 sen in FY17, or a slightly lower yield of 4.3%.
  • Lowering earnings forecast – We are reducing our revenue and EPS forecasts by 5% and 0.8% for FY16 and 6.1% and 2% for FY17 respectively considering quarterly sales came below expectations, difficulties in lifting ARPU and improvement in profit margins.
  • Maintain HOLD – Our recommendation is kept at HOLD with an lower target price of RM4.71 based on DDM as we roll over to FY17 valuation.

[PDF]– TA Securities
[PDF]– JF Apex

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