Investment Highlights

• We maintain our HOLD rating on Digi.Com with an unchanged DCF-based fair value of RM4.40/share derived from a WACC of 6.3% and terminal growth rate of 2%. This implies an FY20F EV/EBITDA of 12x — in line with its 2-year average together with a supportive dividend yield of 4%.
• Our FY20F–FY22F earnings are unchanged as Digi’s 9MFY20 net profit of RM941mil (-14% YoY) was in line with our FY20F net profit, accounting for 76% of our FY20F earnings – similar to the past 3-year trend. However, the result is below consensus as our FY20F earnings are 5% below street’s.
• The group declared an 11% QoQ increase in 3QFY20 DPS to 4.1 sen due to the stronger sequential earnings performance. However, 9MFY20 DPS still fell by 13% YoY to 12 sen on an almost 100% payout ratio due to the lower YTD performance.
• Digi’s 3QFY20 net profit rose by 11% QoQ in tandem with a 9% growth in revenue, driven by a 52% surge in device sales and 4% increase in service revenue. Following lower subscribers in 2QFY20 with the temporary closure of physical outlets during the Covid-19 movement control order (MCO), service revenue gained momentum mainly from a 10% QoQ irise in prepaid revenue, partly offset by a 2% QoQ drop from the postpaid segment.
• The prepaid segment enjoyed a 67K QoQ increase in subscribers and RM4/month QoQ gain in average revenue per user (ARPU) to RM33/month from new Abadi and NEXT packages. However, the postpaid segment still struggled with subscribers declining by 10K QoQ to 3mil and ARPU slipping by RM1/month QoQ to RM67/month despite the launch of new Phone Freedom 365 plans.
• The higher revenue was partly offset by a 69% QoQ climb in cost of materials due to higher number of handsets sold, as well as an 8% increase in operating expenses, which led to a slight 2% rise in 3QFY20 EBITDA. The EBITDA improvement together with a 32% fall in interest expense to a more normalised RM49mil given 2QFY20 refinancing costs and 5% decline in depreciation to RM313mil propelled the 11% increase in 3QFY20 net profit.
• Management has adjusted its FY20F guidance for service revenue decline from a low single-digit to low-to-medium single digit while EBITDA decrease from medium-single digit to medium-to-high single digit. As in the earlier guidance, capex is still expected to be similar to FY19, which translates to a capexto-service revenue of 14% vs. 13% in FY19 due to weaker service revenue..
• Including asset retirement obligations to dismantle cellular sites, Digi’s 3QFY20 capex shrank 40% QoQ to RM134mil as management repositioned spending with its new RAN procurement agreement with ZTE. However, with 9MFY20 capex decreasing by 9% YoY to RM498mil, this implies a faster rollout and potential 1.9x QoQ increase in 4QFY20 spending.
• The stock currently trades at a fair FY21F EV/EBITDA of 12x – at parity to its 2-year average with decent dividend yields of 4%.

Source: AmInvest Research - 16 Oct 2020