Investment Highlights

• We maintain our HOLD rating on Digi.Com with an unchanged DCF-based fair value of RM4.50/share, which implies an FY18F EV/EBITDA of 13x, the stock’s 2-year average.

• Digi’s FY17F-FY19F earnings are maintained as the group’s 9MFY17 net profit of RM1,117mil was generally in line with expectations, coming in 75% of earlier FY17F earnings and 72% of consensus.

• We expect higher spectrum amortisation charges and year-end marketing costs to lead to a sequentially weaker 4QFY17 bottom line. As a comparison, Digi’s 9MFY16 accounted for 77% of FY16 net profit.

• Hence, the group’s declaration of a 3QFY17 DPS of 4.9 sen, bringing 9MFY17 DPS to 14.4 sen (-11% YoY) with a payout of 100% is also is line with expectations.

• Digi’s 9MFY17 service revenue declined 6% YoY to RM4.4bil, slightly worse than management’s revised FY17F service revenue guidance of a flat to low-to-mid-single-digit decline, while EBITDA margin improved almost 1ppt vs. a flat target.

• The 22% increase YoY in depreciation and amortisation to RM576mil, arising from higher capex and the 900MHz and 1800MHz spectrum fee, led to 9MFY17 net profit decreasing at a faster 11%.

• Ex-spectrum capex spending has slowed down, falling 34% QoQ to RM152mil, leading to a decline in service revenue ratio of 13.1%, from 14.6% in 1HFY17. It is likely to ease further towards the year-end, which should be in line with management’s unchanged guidance ratio of between 11% and 13%.

• On a QoQ comparison, Digi’s 3QFY17 service revenue rose 1.6% after 2 consecutive quarterly declines, driven by a loss in prepaid subscibers. The improvement in service revenue stemmed from a 295K increase in postpaid subscribers to 2.4mil since the beginning of the year, partly offset by a RM1/month QoQ decline in postpaid average revenue per user (ARPU) to RM77/month.

• Prepaid revenue stabilised at RM919mil, even though subscribers fell 3% to 9.5mil. The overall 1.1% QoQ revenue increase together with a 66% plunge in interest cost (mostly from the absence of one-off refinancing costs in 2QFY17) led to Digi’s 3QFY17 net profit increasing by 7% QoQ to RM385mil.

• Even though the decline in service revenue since 1QFY17 has been temporarily relieved in the current quarter, we note that the overall trajectory is still constrained as prepaid subscribers have declined by 798K or 8% YoY amidst rotational churn.

• The stock currently trades at a fair FY18F EV/EBITDA of 14x near its 2-year average. Given the highly competitive landscape, we expect Digi’s subscriber growth and ARPUs to remain under pressure as both Maxis and Celcom are also aggressively improving 4G coverage and service quality.

Source: AmInvest Research - 17 Oct 2017