Distorted by new standards

Special note: Digi adopted a new accounting standards – MFRS 15 in FY18. However, no retrospective adjustments were made to the FY17 figures. Thus, our 1Q18/FY18 review is based on pre-MFRS 15 figures.

• Digi’s 1Q18 core profit fell 2% qoq, 6% yoy to RM349m. EBITDA grew 2% qoq and 4% yoy on cost savings and postpaid revenue growth but were negated by higher depreciation charge.

• As at end 31 Mar, Digi trimmed its conventional debt further to 21% of total asset (31 Dec: 22%). Its Annual Audited Accounts made it to Bursa on 28 Mar 2018, in time for the SAC screening deadline of 31 Mar. This should improve its odds of re-inclusion.

Gains offset by higher depreciation and amortisation charge

Digi kicked off FY18 with a weak tone – 1Q18 core profit fell 7% qoq and 5% yoy to RM349m – inline with ours and consensus estimates as well as Digi’s guidance. Operationally, we note some positives; service revenue grew 0.7% yoy led by the postpaid segment while EBITDA rose 4% yoy on various cost optimisations. However, these were more than offset by higher depreciation charge and interest expense amidst higher capex investments and spectrum assets while net debt also rose to 0.8x (relative to EBITDA) compared to 0.7x in 1Q17.

Encouraging postpaid traction

The postpaid segment made encouraging headway. Subscribers (subs) increased to c.2.6 million after with healthy net add of 91 million while data revenue grew to RM422m (+4.7% qoq, 24.1% yoy). Despite the strong addition, ARPU held steady at RM77 (4Q17: RM78).

Relentless cost containment

Digi’s cost containment (ex-depreciation & amortisation) remains robust. In 1Q18, O&M and rental expense fell the most; management noted that key SLAs were renegotiated while we also recall that some were retired in FY17, incurring a one-off RM6m charge in 4Q17.

Declared first interim DPS

A first interim DPS of 4.9 sen was declared implying a 98.7% payout.

Odds improving for Shariah status

Digi was excluded from the Shariah-compliant stocklist as at 27 Nov 2017 after conventional debt at end 2016 breached the 33% limit. The Shariah Advisory Council (SAC) screening process is based solely on Audited Accounts. Digi submitted its 2017 Annual Audited Accounts to Bursa on 28 Mar 2018, ahead of the 31 Mar deadline. Conventional debt to total asset stood at 22%. We believe this drastically improve the odds of its re-inclusion into the Shariah-compliant list on 25 May.

Source: BIMB Securities Research - 16 Apr 2018