Digi 1Q19 – TA Securities

On a pre-MFRS 16 basis, Digi reported 1QFY19 net profit of RM366mn (3.1% QoQ, -5.2% YoY), which came within ours and consensus estimates at 23.9% and 23.5% respectively.

1st interim dividend of 4.3sen/share (-10.4% QoQ, -12.2% YoY) was declared. This represents a payout ratio of 91.5% which is consistent with the group’s dividend policy of distributing at least 80% of net profit.

YoY. Service revenue declined 4.7% YoY to RM1,393mn as the prepaid segment’s weakness on lower legacy voice revenues outweighed the postpaid segment’s strength on higher data revenues. The prepaid segment was challenged by: 1) declining voice traffic, 2) the 33% reduction in mobile termination rates effective 1 January 2019, and 3) net churns of 790k YoY. Notwithstanding, driven by a growing mix of internet subscribers within both the prepaid and postpaid segment, contributions from internet as a percentage of service revenue improved further 9.8pp YoY to 61.9%.

QoQ. After holding steady for 3 quarters, service revenue declined 3.1% QoQ to RM1,393mn due to seasonality and challenges from the prepaid segment as aforementioned. Of note, net churns of 459k QoQ from the prepaid segment was the heaviest in 8 quarters and according to management this was attributed to its reviewed strategy to clean out rotational non-internet/traditional subscribers and focus on driving sustainable growth from internet subscribers. Meanwhile, the postpaid segment’s growth moderated with service revenue marginally up 0.2% QoQ, supported by net adds of 50k QoQ and stable ARPU (unchanged at RM71/month).

At the bottom line, EBITDA declined 2.3% QoQ and 6.7% YoY to RM723mn in tandem with the lower revenue. However, EBITDA margins improved 3.7pp QoQ and 0.5pp YoY to 47.9% as on-going cost optimisation efforts in areas such as sales and marketing, operations and maintenance, and staff led to leaner opex (-2.4% QoQ, -0.4% YoY).

In terms of CAPEX, RM168mn or 12.1% of service revenue was expended mainly on network upgrades and expansion as well as digital capabilities. As at 1QFY19, the group’s 4G LTE and LTE-A coverage was at 89% (unchanged QoQ, +1pp YoY) and 67% (+2pp QoQ, +10pp YoY).

Our FY19/FY20/FY21 earnings are revised marginally +0.2%/+0.5%/+0.7% to RM1,535mn/RM1,604mn/RM1,667mn upon imputing FY18 audited figures into our model.

For FY19, management reiterated its guidance for: i) service revenue to be around FY18’s level, ii) EBITDA to grow by low-single digit, and iii)

CAPEX to service revenue ratio in the range of 11% to 12%. Focus would be placed on driving growth from existing customers, the postpaid segment, SME/B2B’s (e.g., via digital businesses), enhancing network experience, and cost optimisation initiatives. Note, however, that our forecasts trail management’s guidance with expectations for a low-single digit decline in service revenue (-2.8%) and EBITDA (-2.0%) as we foresee sustained challenges from the prepaid segment on the back of competitive pressures.

Rolling forward our valuation base year to CY20, we value Digi at a revised TP of RM4.25/share (RM4.20/share previously) based on a WACC of 7.5% and long-term growth rate of 1.0%. While the stock’s forward dividend yields of 4.1%/4.3%4.5% in FY19/FY20/FY21 may appear decent, we opine that it is not attractive enough to warrant an entry at current levels considering the downside risk from further challenges within the prepaid segment. Reiterate Sell.


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