Digi reported a 10.8% drop in 1QFY22 net profit to RM236.1m, mainly due to a jump in tax cost as the effective tax rate rose to 37% due to the effects of Cukai Makmur. The results were in with expectations, accounting for 22% and 20% of our and consensus full-year estimates respectively. We maintain our FY22-24F earnings forecasts. The proposed merger with Axiata Celcom is expected to complete within the second half of 2022, which was previously targeted to be finalised by the first half of this year. The delay was expected however following the recent request by the Malaysian Communications and Multimedia Commission (MCMC) to address concerns over market competition arising from the merger. Maintain Neutral call on Digi. A first interim dividend of 2.9 sen per share was declared (1QFY21: 3.4 sen per share).

• 1QFY22 revenue was down 1.8% YoY, as an increase in postpaid revenue was offset by a decline in prepaid contribution. Prepaid revenue fell by 4% due to a drop in both subscriber base (-3.6% YoY) and ARPU (-3% YoY). Meanwhile, postpaid revenue improved by 2.6% YoY as customer base increased by 8% YoY on a lower ARPU (-6% YoY). The group has also reduced its focus on lower-margin digital business, leading to a 25% drop in revenue to RM60m.

• 1QFY22 net profit fell by 10.8% YoY mainly due to a 47% jump in tax cost following the imposition of Cukai Makmur. Effective tax rate increased to 37% from 26% in 1QFY21. Total cost has improved with cost of goods sold falling by 9% in line with lower digital and device sales volume while opex remained stable at about RM400m (+1.5% YoY). Depreciation cost was also lower, falling by 3.8%. As a result, EBITDA margin remained resilient at about 48%.

• 5G discussion still on-going. The four mobile network operators (MNOs), including Digi, are still in talks with Digital Nasional Bhd (DNB) to finalise the terms in the reference access order (RAO). The RAO generally contains terms and conditions on access to the network facilities and services that will be made available to acess seekers. Reaching an agreement with DNB and the MCMC is crucial before all parties can proceed with the discussion on commercial acess agreement. In March, the government announced that DNB would retain the single wholesale network model for the nation’s 5G rollout with the MNOs pledging their support and commitment in playing an active role in 5G implementation.

Source: PublicInvest Research - 5 May 2022