Investment Highlights

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

• We came away from a meeting with management last Friday with these salient takeaways:

• Although no guidance has been provided by management on Digi’s reinstatement in the Securities Commission’s syariah compliance list by May this year, we view it as a strong likelihood given that the group has already achieved a conventional loan-to-total asset ratio of below 33% since 2QFY17, and down to 21% as at 21 March 2018. Additionally, Digi has submitted its FY17 audited accounts before the cut-off date on 31 March 2018.

• Recall that Digi was excluded from the syariah list on 24 November last year as its conventional debt-to-total asset ratio reached 41% as at 31 Dec 2016, following the lumpy payment of RM599mil for the spectrum fees of the 900MHz and 1800MHz.

• Since 2QFY17, the group has issued a sukuk bond programme of up to RM5bil, of which only RM900mil has been disbursed to date. This covered the payment of the spectrum fee of RM118mil for the 2100MHz in January this year, and should easily meet the upcoming 700MHz band fee, expected to be announced soon.

• Management views that the different accounting treatment by telco operators for device sales before the recent implementation of MFRS 15 led to the significant variation to the bottom line. Recall that Digi showed a 10% increase in 1QFY18 net profit vs Maxis’ decline of 1%-3%. Nevertheless, we note that Maxis’ recent results showed a retroactive adjustment to FY17 results while Digi only showed the impact in 1QFY18. Digi maintains its FY18F service revenue guidance of a flat-to-low single-digit decline vs. a 5% decrease in FY17.

• Following Maxis’ recent Hotlink Flexi Postpaid plan of RM30 for 1GB data with an option to purchase 5GB for RM25, Digi has yet to introduce new options. While management indicates focus remains on providing different options to its customers such as roaming flexibility and permutations in family plans, we expect new plans to emerge soon to maintain its postpaid market share. In 1QFY18, Digi’s prepaid subscribers declined 401K YoY to 9.2mil, which has almost been offset by its postpaid subscribers increasing by 382K to 2.6mil.

• 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 - 23 Apr 2018