2Q18 core net profit rose 7% yoy to RM384m (flat qoq) thanks to 16% yoy postpaid revenue growth and good cost discipline (EBITDA-to-service-revenue margin stable at 50%). We deem 1H18 core net profit of RM770m to be in line with house and street estimates. MAINTAIN BUY. Target price: RM5.40. The stock offers sustainable and attractive dividend yield of close to 5%. We see a compelling risk-reward profile for this well-managed company.

RESULTS

Within expectations, earnings tracking management targets. Digi.com (Digi) grew 2Q18 core net profit by 7% yoy to RM384m (flat qoq), driven by strong postpaid service revenue and good cost discipline. This brings 1H18 core net profit to RM771m (+5% yoy, in line with house and street estimates. The group continues to focus on its internet proposition anchored by rapidly-expanding LTE coverage. The group declared a second interim net DPS of 4.9 sen/share, bringing 1H18 net DPS to 9.8 sen/share. We project full-year net DPS of 19.5 sen/share, translating to an attractive net dividend yield of 4.7%.

STOCK IMPACT

2Q18 service revenue grew 4% yoy to RM1,618m (-1% qoq). This performance reflects solid post-paid subscriber growth (+16% yoy; 3% qoq) and stronger data monetisation (as smartphone users rose to 75%). Internet revenue rose 26% yoy and 6% qoq to RM805m and this helped to partly mitigate sliding IDD revenue and the adverse impact of the mobile termination rates (MTR) revision effective 1 Jan 18.

Solid post-paid performance… 2Q18 post-paid revenue continued to rise by 16% yoy and 5% qoq to RM619m, driven by successful upselling efforts. In essence, Digi experienced an increase in plan upgrades via subscriptions for high-value plans enabled with Borderless Roaming propositions and easy entry plans with affordable 4G device bundles, supported by stronger data management, data insights and digitisation. All these helped to drive post-paid net adds of 84,000 to 2.7m post-paid subscribers (+16% yoy; +3% qoq). Postpaid ARPUs declined by RM2/month yoy to RM76/month as a result of continuous prepaid to postpaid entry level plan conversions.

…while 2Q18 prepaid revenue continued to fall, albeit a smaller decline vs a year ago.

As a result of sliding IDD revenue base and lower mobile termination rates (MTR) effective 1 Jan 18, prepaid revenue fell 6% yoy and 3% qoq to RM865m. Positively, Digi successfully drove mobile internet revenue with a 21% yoy increase in internet revenue to RM405m (accounting for 47% of prepaid revenue). This helped to partly offset declining prepaid legacy voice and messaging revenues. Recall that Digi had moved away from the irrational IDD price war since the early part of 2016, and this had resulted in stabilisation within the prepaid segment. ARPU was stable at RM32/month but prepaid subscriber base dropped to 9m (2Q17: 9.7m) amid the continued impact from prepaid to postpaid conversions.

2Q18 EBITDA-to-service-revenue stable at 50%, thanks to lower traffic cost from MTR revision and reduced IDD traffic volumes. This reflects the group’s success in recalibrating its IDD pricing and focus on better subscriber quality (Malaysian prepaid market is a key opportunity) and margins. Additionally, Digi’s good cost discipline led to lower sales and marketing expenses and operational and maintenance cost in the quarter. All in all, 2Q18 core net profit rose to RM384m (+7% yoy; flat qoq).

EARNINGS REVISION/RISK

No change to earnings forecasts. Digi guided that its 2018 priorities will include: a) driving sustainable growth from core telco revenue by accelerating post-paid revenue, b) continuing to deliver on cost agenda with sustainable and efficient cost structure (2017, Digi was able to reduce opex by 2.8%), and c) continuing transformation journey to digitise its core business. As such, management is guiding for a conservative flat to low single-digit decline in service revenue while maintaining EBITDA at 2017’s level.

Risks include: a) entry of TM’s subsidiary, webe, into the prepaid segment. This would create short-term pricing competition in its bid to win market share, b) severe economic downturn, and c) potential bidding war for spectrum within the sector.

VALUATION/RECOMMENDATION

Maintain BUY and DCF-based target price of RM5.40. At our target price, the stock trades at 26x 2019F PE and 14.5x EV/EBITDA. Dividend yields would be compressed at 3.8% on our target price.

SHARE PRICE CATALYST

• Better-than-expected postpaid service revenue growth.
• Good cost efficiency measures.
• Active capital management.

Source: UOB Kay Hian Research - 16 Jul 2018