• Digi saw another weak results as 3Q17 earnings fell 12% yoy and -11% for 9M17 to trail forecasts at 70% (consensus: 72%).

• On qoq basis, 3Q17 earnings rose 7.2% mostly on sharp drop in interest cost paying off a RC facility. Also, postpaid revenue hit a new record while prepaid revenue stabilized.

• A third interim DPS of 4.9sen (RM381m) was declared, payable on 22 Dec 2017, implying a 99% payout.

• While qoq earnings growth was encouraging, we expect 4Q17 to be weaker on seasonality and timing of expenses. We cut FY17-19F forecast by 11-15%.

• Downgrade to HOLD (from Buy) with lower DCF-derived TP of RM4.70 (from RM5.60).

Reprieve from lower interest expense

Overall, Digi’s performance remained under pressure as the yoy declines were underpinned by weakening ARPU as well as higher opex, depreciation charge and interest costs. Nevertheless, qoq offered mild positives. While the growth was mainly due to lower interest cost (from RC repayment), postpaid revenue strengthened further while prepaid revenue stabilized. Its 9M17 earnings fell 11% and trailed our estimates at 70% and consensus’ at 72%.

Mild positives on the operation side

EBITDA only grew 1.3% qoq mainly due to postpaid revenue which hit record quarter of RM557m (+3.8% qoq) while prepaid stabilised at RM919m (+0.8% qoq). However, this was mostly offset by the higher depreciation charge amidst the rolling out of 900MHz. Net earnings however, grew 7.2% qoq as interest cost (- 66.2% qoq) fell sharply after repayment of revolving credit (RC) facility in 1H17.

Still a tough market

Despite growing internet users (8.5 million) and postpaid subs (2.4 million), its revenue base is still prepaid-centric which has come under pressure from intense competition. Digi invested RM578m in capex up to Sep 2017 with deployment of LTE 900Mhz sites. Management guided capex to be 11%-13% of service revenue.

Further cuts

We pared FY17-19F net earnings by 11-15% on lower prepaid subs and ARPU, higher depreciation charges and marketing expense while updating our balance sheet for new debts and interest rates.

Downgrade to HOLD; lower TP of RM4.70

We lowered our DCF-derived TP to RM4.70 (from RM5.60) and downgraded our call to HOLD (from Buy). While growing postpaid revenue and subs are encouraging, we are cautious over its high reliant on prepaid subs which typically sees high rotational churns, price-sensitive and vulnerable to economic shocks.

Source: BIMB Securities Research - 19 Oct 2017