Investment Highlights

• We downgrade our rating on Digi.Com to HOLD from BUY as the share price has risen by 15% since our upgrade on 18 March from its 8-year low of RM3.92/share to near our lowered DCFbased fair value of RM4.55/share (from an earlier RM4.70/share). This is 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%.

• Our lower fair value stems from a 4%–5% reduction in Digi’s FY20F–22F earnings due to higher operating cost assumptions, as its 1QFY20 net profit of RM133mil (-3% YoY) came in slightly below our expectations. This accounted for 23% of our earlier FY20F net profit but generally in line with consensus.

• As a comparison, 1Q accounted for 24%–25% of FY17–FY19 earnings. However, as we had forewarned in past updates, the group’s 1QFY20 DPS slid 0.2 sen QoQ to 4.2 sen due to the lower earnings.

• Digi’s 1QFY20 net profit dropped 6% QoQ in tandem with a 7% decrease in revenue, driven by the decline in prepaid contribution, lower device sales and revision in the rates of interconnection fees. This was partly offset by interest cost sharply falling by 68% QoQ to RM22mil due to interest-rate swaps on borrowings.

• YoY, Digi’s net subscribers fell by 250K with prepaid losing 500K subscribers which was partly offset by gains in postpaid users. While prepaid average revenue per user (ARPU) was stable QoQ at RM30/month, blended ARPU slid RM1/month to RM40/month due to a RM3/month decline in postpaid to RM69/month. This stemmed from lower pricing entry from prepaid migration and decreasing non-revenue generating subscribers.

• Management highlighted that its guidance will be revisited due to the movement control order (MCO), Covid-19 pandemic and economic outlook. Recall that Digi expects a flat low singledigit drop for service revenue and EBITDA trajectory in FY20F due to a continued fall in prepaid and legacy customers, and a 0.96 sen decline in mobile termination rates this year.

• Management does not expect any increase in operating costs from the sector-wide 1GB free data offers during the MCO while providing alternative channels to customers. While spending to upgrade capacity upgrade and expand fibre networks, Digi’s 1QFY20 capex still decreased by 17% YoY to RM139mil. However, management had earlier guided for overall capex this year to be flat YoY, which could mean a capex-to-service revenue ratio of 14% vs. 13% in FY19.

• 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 - 24 Apr 2020