PublicInvest Research

Author: PublicInvest   |   Latest post: Tue, 21 May 2019, 9:49 AM


DiGi.Com - Dragged By Lower Prepaid Revenue & MFRS 16

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DiGi reported an 11.6% decline in 1QFY19 net profit to RM341.5m, mainly due to the adoption of MFRS 16 and lower prepaid revenue. MFRS 16 requires the lessee accounting to apply a “right-of-use” approach in recognizing assets and liabilities for the rights and obligations created by the lease contracts that were previously off-balance sheet items. This has resulted in a drop in operating expenses but an increase in depreciation, amortization and finance costs. Meanwhile, prepaid revenue was down 13.7% YoY due to an 8.6% decline in subscriber base. We cut our FY19-21F earnings by 5% to factor in the impact of MFRS 16 adoption, which results in a net increase in finance cost. As such, our TP is revised down from RM4.80 to RM4.72. We maintain our Neutral rating on DiGi. A first interim dividend of 4.3sen per share was declared (1QFY18: 4.9sen).

  • 1QFY19 revenue and net profit dropped 7.7% due to a 4.3% and 33% decline in service revenue and device revenue respectively. Prepaid segment posted lower revenue due to an 8.6% drop in subscriber base while ARPU shed RM3 to RM29. There was a significant change in prepaid mix with reduced reliance on traditional voice, but this was partly offset by higher contribution from the postpaid segment. The split between prepaid and postpaid revenue stood at 55:45, compared to 61:39 in 1QFY18.
  • 1QFY19 net profit fell 11.6% YoY, owing to the adoption of MFRS 16 and lower prepaid revenue. MFRS 16 has resulted in a 6.6% drop in earnings on the back of a net increase in finance costs due to recognition of finance leases of c.RM2bn on the balance sheet. Meanwhile, the drop in overall revenue has led to a further 5% decline in 1QFY19 net profit. Post-MFRS 16, EBITDA margin jumped to 53.4% due to lower operating expenses. However, excluding the impact of MFRS 16, EBITDA remained stable at 48%. As a result of finance lease recognition, gross debt/EBITDA is projected to increase to 1.6x in FY19F from 0.9x in FY18.
  • Projecting negative earnings growth. Although the mobile segment has undergone intense competition in recent years, we are of the view that overall ARPU is not likely to increase due to heightened regulatory pressure on the sector. In an environment of falling or stagnant revenue, cost optimization will be the key for players to strive in this challenging industry. Although DiGi has a proven track record, we see limited scope for a meaningful improvement in cost given its already lean and efficient cost management. Coupled with the changes to accounting treatments, we forecast a 3-year earnings CAGR of -3.1%. We maintain our Neutral

rating on DiGi.

Source: PublicInvest Research - 23 Apr 2019

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