Investment Highlights

• We maintain our HOLD rating on Digi.Com with a lowered DCFbased fair value of RM4.05/share (from an earlier 4.40/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%.

• We have cut FY21F–FY22F earnings by 7%–11% by doubling the decline in FY21F subscriber base as Digi is unlikely to reverse its current EBITDA decline trajectory. For FY21F, management is guiding for a medium single-digit EBITDA decline and a low single-digit decline in service revenue.

• Given that Digi has registered a 5-year FY15–FY20 earnings CAGR decrease of 6.7%, we do not expect any substantive recovery in the medium term against the backdrop of the enforcement of the movement control order 2.0, unrelentingly intense cellular competition and negative economic impact of the ongoing Covid-19 pandemic.

• Nevertheless, we note that Digi’s FY20 net profit of RM1,221mil (-15% YoY) was in line with our forecast, but 5% below consensus’ RM1,289mil. The group declared a 12% QoQ drop in 4QFY20 DPS to 3.6 sen due to the lower sequential earnings performance. This partly caused FY20 DPS to fall by 14% YoY to 15.6 sen on an almost 100% payout ratio against the background of overall weaker earnings.

• Digi’s 4QFY20 net profit dropped by 13% QoQ, ahead of a 1% QoQ contraction in revenue, partly due to a 42% surge in interest charges driven by MFRS 16 lease accounting adjustment and interest rate swap. Additionally, Digi’s 4QFY20 did not benefit from a positive RM28mil Universal Service Provider fund finalisation which occurred in 3QFY20.

• Subscribers declined by 240K QoQ to 10.4mil, largely from the prepaid segment which shrank by 258K as Covid-19 imposed immigration restrictions, curtailing migrant acquisitions amid a highly competitive mobile landscape. On a YoY comparison, subscribers tumbled 841K. Nevertheless, the postpaid segment partly benefited from prepaid migration to register a mild 8K YoY increase to 3mil.

• Average revenue per user (ARPU) slid RM1/month QoQ for prepaid customers to RM32/month despite the new Abadi and NEXT packages. The postpaid ARPU also slipped by RM1/month QoQ to RM66/month with the launch of new Phone Freedom 365 plans.
   
• Including RM5mil asset retirement obligations to dismantle cellular sites, Digi’s 4QFY20 capex doubled QoQ to RM275mil as management continued spending with its new RAN procurement agreement with ZTE, translating to a capex-to-revenue ratio of 12.6%. While management expects to optimise its spending levels, the group is guiding for a higher capex-to-revenue ratio of 14%–15%. Assuming a 3% revenue decline, we estimate that the group’s FY21F capex could increase by 16%.
   
• Amid declining EBITDA and higher capex expectations, 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 - 29 Jan 2021