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 1HFY18 pre-MFRS 15 net profit of RM711mil came in within expectations, accounting for half of our forecast (similar to 1HFY17 against FY17 earnings) and 48% of consensus.

• Including the MFRS 15 adoption, which largely affected the accounting treatment of its handset contracts, Digi’s net profit increased by 8% to RM771mil, while revenue rose 2% or RM66mil. With a dividend payout of 99%, the group’s annualised 1HFY18 DPS of 9.8 sen appears to be 8% above our currently unchanged dividend assumptions.

• Post-MFRS 15 treatment, the group’s service revenue was flat QoQ as the 182K decline in prepaid subscribers was offset by the 84K increase in higher value postpaid users. Hence, the group has slightly raised its FY18F service revenue guidance to flat from an earlier flat-to-low single-digit decline in the previous quarter.

• In 2QFY18, overall subscribers continued to decline by 98K as the larger decline in the prepaid segment overwhelmed postpaid accretion. Nevertheless, the rising postpaid contribution has led to its proportion to increase to 42% in 2QFY18 from 37% in 2QFY17 as blended average revenue per users (ARPU) remained relatively unchanged QoQ.

• The group’s 2QFY18 EBITDA margin slid 2.4ppts QoQ to 45% due to RM40mil one-off transition costs for the group’s inhouse network sourcing structure. However, this was offset by a 21% QoQ decline in depreciation and amortisation arising from a one-off reversal on fully depreciated assets and lower amortisation from the 2100MHz spectrum reassignment on 1 April this year. This was further supported by a 12% QoQ fall in traffic costs to RM199mil. Hence, 2QFY18 net profit was flat QoQ at RM384mil.

• Digi’s FY18F EBITDA guidance is slightly more optimistic at 46%-47% vs. an earlier flat guidance, which recalled 46% in FY17. For now, we maintain our amortisation assumptions as the group’s capex guidance is unchanged at 10%-12% vs. 12.6% in FY17.

• As 2QFY18 capex slid 19% QoQ and 36% YoY to RM147mil (10% of service revenue), we expect spending to accelerate which could raise depreciation charges in subsequent quarters. However, we may upgrade our earnings forecasts by 5%-10% in the subsequent quarter if management’s drive to secure cost efficiencies from its network operating model transition gains traction.

• The stock currently trades at a low FY18F EV/EBITDA of 12x below its 2-year average of 14x. This stems from the highly competitive landscape as subscriber growth and ARPUs remain under pressure.

Source: AmInvest Research - 16 Jul 2018