Investment Highlights

• We maintain our HOLD rating on Digi.Com but with lower DCFbased fair value of RM4.40/share (from RM4.55/share earlier). 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 6%–8% reduction in Digi’s FY20F–22F earnings due to lower service revenue assumptions, as its 1HFY20 net profit of RM620mil (-16% YoY) came in below expectations, accounting for 45%-46%% of our earlier FY20F net profit and consensus. As a comparison, 1H accounted for 50%–51% of FY17–FY19 earnings.

• However, as we had forewarned in past updates, the group’s 2QFY20 DPS fell 0.5 sen or 12% QoQ to 3.7 sen due to the lower earnings. This translates to a 15% decline in 1HFY20 DPS to 7.9 sen and 100% payout ratio.

• Digi’s 2QFY20 net profit decreased by 13% QoQ in tandem with a 7% decrease in revenue, driven by a 5% decline in service revenue and 22% drop in device sales. The service revenue decreased stemmed from lower subscribers and average revenue per user (ARPU) for both prepaid and postpaid segment, together with lower roaming and voice contributions, constrained by travel restrictions.

• Even though exacerbated by a 3.3x QoQ surge in interest costs to RM72mil, the bottomline was partly supported by a 34% reduction in handphone costs and 10% QoQ reduction in operating costs stemming from decreased sales and marketing (-16%), staff (-20%) and others (-19%).

• QoQ, Digi’s net subscribers fell by 338K, comprising 309K from prepaid subscribers and 29K from postpaid users due to decreasing non-revenue generating subscribers amid involuntary churn and reduced new intakes with the temporary closure of physical outlets during the Covid-19 movement control order (MCO).

• Blended ARPU was stable QoQ at RM40/month even though both prepaid and postpaid segments slid by RM1/month. Despite recent prepaid plans offering 3GB/month at RM15/month (half of its current ARPU), Digi expects entry level users to upgrade from given the 2Q20 monthly usage of 18GB.

• Management has revised FY20F service revenue from a flat to low single-digit drop to low single-digit decline and EBITDA decline of medium single-digit decrease. As in the earlier guidance, capex is still expected to be similar to FY19, which translates to a capex-to-service revenue of 14% vs 13% in FY19 due to weaker service revenue. Including asset retirement obligations of RM46mil to dismantle cellular sites, Digi’s 2QFY20 capex rose 62% QoQ to RM225mil. However, spending is still muted due to the MCO, with 1HFY20 capex decreasing by 15% YoY to RM364mil. This implies a faster rollout and 7% increase in 2HFY20 spending.

• 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 - 15 Jul 2020