AmInvestment Bank, April 23- We maintain our “hold” rating on DiGi.Com Bhd with unchanged forecasts and discounted cash flow-based FV of RM4.50 per share, which implies a financial year 2018 (FY18) earnings before interest, taxes, depreciation and amortisation (EV/Ebitda) forecast of 13 times, the stock’s two-year average.
Although no guidance has been provided by management on DiGi’s reinstatement to the Securities Commission Malaysia’s (SC) syariah compliance list by May this year, we view it as a strong likelihood given that the group has already achieved a conventional loan-to-total asset ratio of below 33% since second quarter of FY17 (2QFY17), and down to 21% as at March 21, 2018. Additionally, DiGi submitted its FY17 audited accounts before the cut-off date on March 31, 2018. Recall that DiGi was excluded from the syariah list on Nov 24 last year as its conventional debt-to-total asset ratio reached 41% as at Dec 31, 2016, following the lumpy payment of RM599 million for the spectrum fees of the 900MHz and 1,800MHz. Since 2QFY17, the group has issued a sukuk bond programme of up to RM5 billion, of which only RM900 million has been disbursed to date. This covered the payment of the spectrum fee of RM118 million for the 2,100MHz in January this year, and should easily meet the upcoming 700MHz band fee, expected to be announced soon.
Management views that the different accounting treatments by telcos for device sales before the recent implementation of Malaysian Financial Reporting Standards 15 led to the significant variation to the bottom line. Recall that DiGi showed a 10% increase in 1QFY18 net profit versus Maxis Bhd’ decline of 1%-3%. Nevertheless, we note that Maxis’ recent results showed a retroactive adjustment to FY17 results while DiGi only showed the impact in 1QFY18. DiGi maintains its FY18 service revenue forecast guidance of a flat to low single-digit decline versus a 5% decrease in FY17.
Following Maxis’ recent Hotlink Flexi Postpaid plan of RM30 for 1Gb data with an option to purchase 5Gb for RM25, DiGi has yet to introduce new options. While management indicates its focus remains on providing different options to its customers such as roaming flexibility and permutations in family plans, we expect new plans to emerge soon to maintain its post-paid market share. In 1QFY18, DiGi’s prepaid subscribers declined 401,000 year-on-year to 9.2 million, which was almost offset by its post-paid subscribers increasing by 382,000 to 2.6 million.
The stock currently trades at a fair FY18 EV/Ebitda forecast of 13 times near its two-year average of 14 times. Given the highly competitive landscape, we expect DiGi’s subscriber growth and average revenue per user to remain under pressure as both Maxis and Celcom are also aggressively improving 4G coverage and service quality.