Investment Highlights

• We maintain our HOLD rating on Digi.Com with a slightly higher DCF-based fair value of RM4.55/share (from an earlier RM4.50/share), which implies an FY19F EV/EBITDA of 12x, slightly below its 2-year average of 13x.

• We have adjusted Digi’s FY18F-20F earnings by 7%-8% to finally incorporate the MFRS 15, which largely affects the accounting treatment of its handset contracts, as post-MFRS15 9MFY18 net profit of RM1,163mil is 8% higher vs. pre-adjusted earnings.

• Our DPS forecasts, premised on 100% payout, are also likewise adjusted. This is in line with 9MFY18 DPS increase of 0.4 sen YoY to 14.8 sen.

• As management maintains its guidance for a flat FY18F service revenue trajectory and EBITDA margin of 46%-47%, we highlight that the group’s pre-MFRS 15 9MFY18 net profit of RM1,079mil came in within expectations, accounting for 76% of our earlier FY19F earnings and 77% of consensus. This is similar to the 76%-78% for 9MFY15-9MFY17 vs. their respective years.

• Including the MFRS 15 adoption, Digi’s 3QFY18 net profit increased by 2% to RM393mil on lower operating costs, partly offset by the 1% contraction in revenue to RM1.6bil as the decline in prepaid customers more than offset postpaid accretions.

• The group’s service revenue slid 1% QoQ to RM1,438mil as prepaid average revenue per user (ARPU) slid RM1/month to RM31/month.

• We note that prepaid subscribers rose by 69K QoQ to 9.1mil while postpaid climbed by 75K QoQ to 2.7mil, stabilising Digi’s overall subscriber trajectory, which was declining since 2Q2017, with an increase of 144K QoQ to 11.8mil.

• Nevertheless, rising postpaid service revenue, up 8% YoY for 3QFY18, has led to its proportion to increase to 42% in 3QFY18 from 38% in 3QFY17 on unchanged postpaid ARPU of RM76/month while blended ARPU slid RM1/month QoQ to RM41/month.

• The group’s 2QFY18 EBITDA margin rose 1.9ppts QoQ to 46.9% in the absence of the RM40mil one-off transition costs incurred for Digi’s in-house network sourcing structure in 2QFY18.

• As 3QFY18 capex slipped 14% QoQ and 16% YoY to RM127mil (8.6% of service revenue), Digi’s capex guidance has narrowed down to 11%-12% vs. 10%-12% in the previous quarter and 12.6% in FY17. With 9MFY18 capex of RM455mil (-21% YoY) accounting for only 10% of service revenue, we expect spending to accelerate in final quarter.

• The stock currently trades at a low FY18F EV/EBITDA of 12x below its 2-year average of 13x. This stems from the highly competitive landscape as subscriber growth and ARPUs remain under pressure.

Source: AmInvest Research - 17 Oct 2018