Investment Highlights

• We maintain our HOLD rating on Digi.Com with a lower DCFbased fair value of RM4.42/share (from an earlier RM4.55/share) based on WACC of 7.3% and terminal growth rate of 2%, which implies an FY19F EV/EBITDA of 12x, slightly below its 2-year average of 13x.

• As forewarned in our update on 30 January, we have lowered Digi’s FY19F–21F by 6%–7% earnings as its 1QFY19 net profit of RM342mil (-12% YoY) came below expectations, accounting for 22% of our FY19F net profit vs. 24%–25% over the first quarters of the past 3 years.

• While management maintains an FY19F guidance of flat service revenue and low single-digit EBITDA growth, we have adopted a more conservative approach given that 1QFY19 service revenue has declined by 5% YoY amid an adverse impact from the implementation of the MFRS 16 which reclassified most operating leases to finance leases. We also caution that Digi is unlikely to maintain its FY18 DPS of 19.6 sen, as the declared 1QFY19 DPS translates to a 12% YoY drop to 4.3 sen.

• Given the struggle against topline growth, management’s FY19F EBITDA expansion guidance largely stems from its cost reduction measures. For now, this appears to be supported by Digi’s 1QFY19 YoY reduction in sales & marketing expenses (- 9%) and operations & maintenance costs (-5%), albeit skewed by a RM22mil one-off efficiency reduction.

• 1QFY19 capex of RM168mil translates to 12% of service revenue, in line with the earlier guidance of 11%–12% and our assumptions. However, we note that amortisation costs could remain on the uptrend from additional fees for the 700MHz spectrum, which costs RM21.6mil/MHz for the price component and RM1.9mil/MHz for annual fee.

• Digi’s 1QFY19 revenue fell 10% QoQ from the halving in device sales following the Phone Freedom 365 ownership promotion in the previous quarter, which was exacerbated by a 3% service revenue decline. Together with depreciation and amortisation surging 55% QoQ to RM305mil and finance cost escalating to 68% QoQ to RM52mil due to the MFRS16 lease impact, which was slightly mitigated by a 3-ppt decline in effective tax rate, 1QFY19 net profit dropped 10%.

• On a QoQ comparison, the 50K increase in 1QFY19 postpaid customers, albeit at a flattish average revenue per user (ARPU) of RM71/month, was unable to offset the 459K decline in the prepaid segment, which registered a RM1/month decline in ARPU to RM29/month.

• All in, Digi’s subscriber base has contracted by 509K (-4%) YoY from the prepaid attrition. The shift from prepaid subscribers has caused its postpaid’s share of group revenue to rise to 45% from 39% in 1QFY18.

• The stock currently trades at a fair FY19F EV/EBITDA of 13x – in line with its 2-year average amid a highly competitive landscape as subscriber growth and ARPUs remain under pressure.

Source: AmInvest Research - 23 Apr 2019