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 FY18F-FY19F earnings are maintained as the group’s FY17 net profit of RM1,477mil (-10% YoY) came in within expectations, almost on the dot of our forecast and just 2% below street’s.

• Likewise, the group’s declaration of a 4QFY17 DPS of 4.6 sen (- 0.3 sen QoQ), translating to a 10% decline in FY17 DPS to 18.8 sen, was also largely in line with expectations. We introduce FY20F earnings with a slight revenue decline given the persistently intense competition for market share amongst its peers.

• The group is guiding for a flat low single-digit FY18F service revenue decrease, arguably better than its earlier FY17F guidance of a flat to low-to-mid-single-digit decline, lowered in 2QFY17 from a flat expectation. However, it is projecting a flat FY18F EBITDA at 46% (similar to 2017 level), which could translate to a lower net profit given that depreciation and amortisation charges are likely to increase, albeit with a slightly lower capex to service revenue guidance ratio of 10%–12% vs. 12.6% in FY17.

• We note that management’s guidance appears to be prudent given that Digi’s 4QFY17 service revenue managed to grow by 2.6% QoQ, the second consecutive gain since 3QFY17 after continuous quarterly contraction since 1QFY16.

• Digi’s FY17 postpaid revenue growth, while commendable at 12% YoY, was unable to fully offset the faster decline of 13% YoY by the prepaid segment, which accounts for 63% of group service revenue.

• Sequentially, prepaid subscribers have fallen by 190K YoY to 9.3mil while postpaid rose 85K to 2.5mil. YoY, Digi’s subscriber base has fallen by 552K to 11.7mil, with the decline stemming from the prepaid division.

• We note that postpaid revenue has risen by 4.1% QoQ to RM580mil, further supported by a RM1/month improvement in average revenue per user (ARPU) to RM84/month. However, prepaid revenue also managed to increase by 1.6% QoQ to RM934mil on a RM2/month increase in ARPU to RM34/month.

• Even though 4QFY17 revenue rose by 4.8% QoQ driven by higher service revenue and device sales, higher fair value adjusted interest charges and one-off settlement costs for IT services led to a 6% sequential net profit decline to RM360mil.

• 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 - 23 Jan 2018