Investment Highlights

• We maintain our HOLD rating on Digi.Com with a slightly lower DCF-based fair value of RM4.70/share (from an earlier RM4.80/share) based on WACC of 6.3% and terminal growth rate of 2%, which implies an FY20F EV/EBITDA of 12x — in line with its 2-year average and a supportive dividend yield of 4%.

• We slightly lower Digi’s FY19F–21F earnings by 1%–2% as its 9MFY19 came in largely within our expectation but below consensus.

• Digi’s 9MFY19 net profit of RM1,090mil (-6% YoY) accounted for 75% of our earlier FY19F net profit and 73% of street’s vs. 76%–77% over the first 9 months of the past 3 years.

• As we had forewarned in our previous updates, Digi’s 3QFY19 DPS was lowered by 5 sen/share QoQ and YoY to 4.6 sen while 9MFY19 EPS decreased by 1 sen YoY to 14 sen given the lower overall earnings.

• While management largely retains its FY19F guidance of low single-digit service revenue decline, Digi has slightly adjusted to a low-medium single digit EBITDA decrease. Also, the group has raised its FY19F capex-to-service revenue ratio guidance to 12%–13% from 11%–12% earlier due to higher network spending, which we had highlighted earlier.

• Recall that Digi had frontloaded 2QFY19 capex to RM261mil or 19% of service revenue to expedite network deployment for capacity upgrades, fibre network expansion and network function virtualisation. We expect 4QFY19 capex to stabilise given that 9MFY19 spending already accounted for 13% of service revenue.

• Digi’s 3QFY19 net profit dropped 9% QoQ to RM356mil largely due to higher one-off operating costs from traffic (+20%), material (+3%) and operation & maintenance (+13%) together with a 7.2 percentage-point increase in normalising effective tax rate to 27% vs. 20% in 2QFY19, partly offset by a slight revenue increase of 1% QoQ to RM1.6bil.

• This flattish revenue trajectory was achieved amid an overall net decline of 34K subscribers mainly from postpaid data contribution as Digi’s priorities in driving prepaid to higher value postpaid conversions increased postpaid subscribers by 67K QoQ and average revenue per user climbed RM1/month to RM71/month, partly offset by a 101K QoQ decline in prepaid users.

• ThIs shift from prepaid subscribers has caused its postpaid’s share of group revenue to rise to 47% in 3QFY19 from 40% in 9MFY18.

• The stock currently trades at a fair FY20F EV/EBITDA of 12x – at parity to its 2-year average with decent dividend yields of 4%.

Source: AmInvest Research - 18 Oct 2019