Investment Highlights

• We maintain our HOLD rating on Digi.Com with an unchanged DCF-based fair value of RM4.55/share based on WACC of 7.3% and terminal growth rate of 2.5%, which implies an FY19F EV/EBITDA of 12x, slightly below its 2-year average of 13x.

• We have fine-tuned Digi’s FY19F-20F earnings as its FY18 net profit of RM1,541mil came in within our and consensus’ expectations.

• We note that our FY19F forecasts are in line with management’s newly revealed expectations, which project a flat service revenue and low single-digit EBITDA growth.

• Given the struggle against topline growth, Digi’s expected EBITDA expansion largely stems from its cost reduction measures. This is supported by the group’s FY18 digitalisation initiatives which have substantively impacted its traffic costs (- 17% YoY), sales and marketing (-13% YoY) and operations and maintenance (-11% YoY).

• Capex guidance of 11%–12% to revenue for this year is well within our assumptions. However, we note that amortisation costs could remain on the uptrend from additional fees for the 700MW spectrum, which costs RM21.6mil/MHz for the price component and RM1.9mil/MHz for annual fee

• Digi declared a fourth interim dividend of 4.8 sen, bringing FY18 DPS to 19.6 sen (+0.8 sen YoY), which is in line with our forecast.

• Digi’s 4QFY18 revenue rose 5% QoQ from the 46% surge in sales of devices under the Phone Freedom 365 ownership programme. However, the group’s 4QFY18 service revenue was flattish QoQ at RM1,437mil as the 411K decline in prepaid subscribers was mostly offset by the addition of 325K postpaid users, amid a flat blended average revenue per user (ARPU) of RM41/month.

• The intentional shift from prepaid subscribers has caused postpaid’s share of group revenue to rise to 43% from 38% in 4QFY17.

• Meanwhile, the higher sale of devices led to Digi’s 4QFY18 EBITDA margin dropping by 2.7bps QoQ to 44.2%. Together with a 1.3bps increase in effective tax rate to 27%, Digi’s 4QFY18 net profit slid 4% QoQ to RM378mil.

• The reduction in mobile termination rates by 33% YoY beginning this year and halving in 2020 is not expected to have any significant impact to group margins as net calls could be minimal while voice traffic has been on a downward trajectory.

• The group reaffirmed that the launch of its home fibre packages (RM95/month for 50Mbps and RM129/month for 100Mbps) involving Tenaga’s fibre network to 1,100 households in Jasin, Melaka is exploratory as this juncture.

• 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 ARPU remain under pressure.

Source: AmInvest Research - 24 Jan 2019