Investment Highlights

• We maintain our BUY rating on Digi.Com with an unchanged DCF-based fair value of RM5.45/share based on WACC of 6.3% and terminal growth rate of 2%, which implies an FY19F EV/EBITDA of 14x — 1SD above its 2-year average of 13x.

• We fine-tuned Digi’s FY19F–21F earnings as its 1HFY19 net profit of RM734mil (-5% YoY) came in within expectation, accounting for 48%–49% of our FY19F net profit and street’s vs. 50% over the first halves of the past 3 years.

• As we had forewarned earlier, management has lowered its FY19F guidance of flat service revenue and low single-digit EBITDA growth to low single-digit decline for both parameters due to persistent prepaid contraction.

• We also continue to highlight that Digi is unlikely to maintain its FY18 DPS of 19.6 sen, as 1HFY19 DPS of 9.3 sen translates to a 5% YoY decline despite a 0.7 sen QoQ increase to 5 sen in 2QFY19.

• 1HFY19 capex of RM429mil translates to 15% of service revenue, higher than management’s unchanged guidance of 11%–12% and our current assumptions.

• In 2QFY19, Digi frontloaded capex to RM261mil or 19% of service revenue to expedite network deployment for capacity upgrades, fibre network expansion and network function virtualisation. This could mean that 2H2019 capex intensity could decelerate while the additional amortisation for the 700MHz spectrum, currently subjected to an MCMC public inquiry, is likely to be deferred towards 4QFY20F.

• Digi’s 2QFY19 revenue rose 3% QoQ mainly from higher device sales amid a flat service segment, as postpaid gains offset prepaid declines. Together with traffic costs decreasing by 10% QoQ and effective tax rate dropping by 5ppts, 2QFY19 net profit rose 15%.

• On a QoQ comparison, Digi’s subscribers rose 113K from gains in both prepaid and postpaid segments, leading to a pause in the consecutive prepaid declines since 3Q2018.

• However, the group’s priorities in driving prepaid to postpaid conversions resulted in the higher value postpaid subscribers, increasing by 71K vs. prepaid’s 42K. The shift from prepaid subscribers has caused postpaid’s share of group revenue to rise to 46% from 41% in 2QFY18.

• While Digi’s costs have increased slightly QoQ in 2QFY19, the overall trend remains lower as sales & marketing and operations & maintenance costs fell by 6% in 1HFY19.

• The stock currently trades at an undemanding FY20F EV/EBITDA of 13x – at parity to its 2-year average – amid potential synergies and cost savings from the proposed merger between Telenor Asia and Axiata.

Source: AmInvest Research - 15 Jul 2019