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-20F earnings are maintained as the group’s 1QFY18 net profit of RM352mil (excluding the impact of MFRS 15) came in within expectations, accounting for 25% of our forecast and 24% of street’s.

• Including the MFRS 15 adoption, which largely affected the accounting treatment of its handset contracts, Digi’s net profit increased by 10% or RM34mil to RM386mil, while revenue rose 2% or RM36mil. With a dividend payout of 99%, the group’s 1QFY18 DPS of 4.9 sen appears to be above our currently unchanged dividend assumptions.

• Post-MFRS 15 treatment, the group’s service revenue fell 1.5% or RM22mil. This supports the group’s unchanged FY18F service revenue guidance of a flat-to-low single-digit decline vs. a 5% decrease in FY17. Management's guidance appears to be prudent given that Digi's 1QFY18 service revenue declined by 2% QoQ under pre-MFRS 15 and further decreased by 3% QoQ based on post-MFRS 15. We highlight that the MFRS 15 affects accounting profit recognition but not actual cash.

• In 1QFY18, prepaid subscribers have fallen by 401K YoY to 9.2mil which has almost been offset by postpaid subscribers increasing by 382K to 2.6mil. QoQ, overall subscribers rose 11K as postpaid accretion was greater than prepaid attrition. This contributed to the proportion of postpaid revenue rising to 40% in 1QFY18 from 35% in 1QFY17.

• Postpaid revenue rose by 2% QoQ to RM591mil, supported by the subscriber increase and partly offset by a RM1/month decrease in average revenue per user (ARPU) to RM77/month. However, prepaid revenue fell 5% QoQ to RM891mil from the subscriber drop and a RM2/month ARPU decline to RM32/month.

• The group’s 1QFY18 EBITDA margin rose 3ppts QoQ to 47% on a 3% QoQ opex decrease as operation and maintentance fell 17%, traffic cost 12%, material 6% and sales/marketing 5%. However, Digi maintains a flat FY18F EBITDA at 46% (similar to 2017 level), which could translate to a lower net profit given that 1QFY18 depreciation and amortisation charges have increased 10% QoQ and 31% YoY from additional spectrum payments.

• Hence, we expect higher depreciation even with a slightly lower capex to service revenue guidance ratio of 10%-12% vs. 12.6% in FY17. 1QFY18 capex slid 8% YoY to RM181mil (12% of service revenue).

• The stock currently trades at a fair FY18F EV/EBITDA of 13x near its 2-year average of 14x. 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 - 13 Apr 2018