DiGi reported a 21.4% YoY decline in 2QFY22 net profit to RM220m, mainly dragged by weaker revenue and higher net finance as well as tax costs. Revenue fell 4.9% YoY on the back of lower prepaid and device revenue while non-cash hedge accounting has resulted in higher net interest cost. The jump in tax cost (+53% YoY) was largely due to Cukai Makmur. The results were below our and consensus expectations, accounting for 43% and 41.5% of full-year estimates respectively. Revenue was within our expectation but net interest as well as tax costs were higher-than-expected. As such, we cut our FY22-24F earnings estimates by 7-10%, factoring in higher interest and tax costs. Our TP is consequently reduced to RM3.83. Maintain Neutral on DiGi. A second interim dividend of 2.80 sen per share was declared (2QFY21: 3.60 sen per share).

• 2QFY22 revenue was down 4.9% YoY, mainly due to a 4.2% decline in prepaid revenue with the Group consciously exiting the low-end rotational migrant segment. Prepaid ARPU dropped by RM1 to RM33 due to lower voice usages but subscriber base improved by 1.4% due to higher proportion of Malaysian subscribers (subs). Meanwhile, device and other revenue was also lower, falling by 23% YoY.

• 2QFY22 net profit fell by 21.4% YoY, dragged by lower revenue, a 32.8% increase in net finance cost as well as a 53% jump in tax cost following the implementation of Cukai Makmur. Effective tax rate increased to 39% from 25% in 2QFY21. The increase in net finance cost was attributable to the impact of non-cash hedge accounting. As a result, normalized PAT margin fell from 18.2% in 2QFY21 to 13.9%. However, we note that EBITDA margin has improved from 45.9% to 48.2% as opex remained stable due to its efficient cost management.

• Outlook. After receiving regulatory approval for its proposed merger with Celcom, DiGi is expected to complete the exercise by end of this year. Based on our preliminary estimate, DiGi could see a slight EPS enhancement of about 2% post-merger. Operationally, we do not expect any major impact in the immediate term with management focusing mainly on the integration phase. In the medium term, we believe there are synergies to be reaped in terms of sharing of resources, network optimization and lower procurement cost due to better scale in purchases. Based on initial estimates by management, the potential value accretion is around RM8bn through cost and capex synergies.

Source: PublicInvest Research - 18 Jul 2022