Investment Highlights

• We maintain our HOLD rating on Digi.Com with an unchanged DCF-based fair value of RM4.70/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 together with a supportive dividend yield of 4%.

• We have fine-tuned Digi’s FY20F–21F earnings as its FY19 net profit of RM1,433mil (-7%YoY) came in largely within our and street’s expectation.

• However, as we had forewarned in past updates, the group declared a 4QFY DPS of 4.4 sen (-0.1 sen QoQ), which leads to a 1.4 sen YoY decline in FY19 DPS of 18.2 sen due to the softer earnings. This is 0.2 sen below our forecast and consensus.

• Management largely extends its FY19 guidance to FY20F with a flat low single-digit decline for service revenue and EBITDA trajectory due to continued decline in prepaid and legacy customers together with a 0.96 sen decline in mobile termination rates this year.

• Digi’s FY20F capex is expected to be similar to FY19’s, which increased by 10% YoY to RM753mil – slightly higher than our expectations given the actual ratio to service revenue of 13.3% vs. management’s revised 12%–13%. With the group’s expected decline in service revenue this year, this could mean that the capex-to-service revenue ratio could rise further to 14% in FY20F.

• At this stage, management did not provide clarity on the expected capex required for 5G rollout given that different options are being considered for the single consortium of operators for the 700MHz and 3.5GHz spectrums.

• Digi’s 4QFY19 net profit dropped 4% QoQ to RM343mil largely due to seasonally higher operating costs from cost of materials (+75%) as a result of higher take-up of postpaid packages and traffic (+9%).

• This was partly offset by service revenue rising by 2% QoQ, driven by a 39K increase in postpaid subscribers and RM1/month increase in blended average revenue per user (ARPU) to RM41/month.

• YoY, Digi’s net subscribers fell by 810K with prepaid losing 1mil subscribers which was partly offset by a gain of 227K postpaid users. As ARPU rose by RM1/month for both prepaid segment to RM30/month and postpaid to RM72/month, the overall service revenue decline was cushioned to only 2.5%.

• ThIs shift from prepaid subscribers has caused the postpaid’s share of group revenue to further rise to 48% in 4QFY19 from 43% in 4QFY18.

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

Source: AmInvest Research - 22 Jan 2020