Special note: Digi adopted the new MFRS 15 accounting standard in FY18. As there are no retrospective adjustments for FY17 figures our review is based on pre-MFRS 15 figures.

• 2Q18 core earnings rose 8% qoq and 7% yoy while 1H18 was up 1% owing to service revenue growth and cost optimisation.
• 1H18 core earnings were ahead of ours and consensus at 54% and 52% respectively, largely on better cost optimization achieved.
• A second interim DPS of 4.9 sen was declared, bringing 1H18 DPS to 9.8 sen which implies 99% payout.
• Digi retuned to the Shariah stocklist in May 2018. We resume coverage with a BUY call and RM4.85 DCF-derived TP.

Primed for a strong year

After a weak 1Q18 results, it surprised with a strong 2Q18 performance. The postpaid segment (+5% qoq, +15% yoy) continues to drive service revenue growth on strong data revenue; it also saw subscriber net adds (+84k qoq, +363k yoy). Cost optimisation remains key; EBITDA margin expanded to 46.8% yoy (+1.5ppts qoq, +0.6ppts yoy). Core earnings growth was also aided by lower depreciation & amortisation (D&A) charge with re-assignment of 2100MHz spectrum for the next 16 years.

Cost containment paying off and more to come

Aside from lower D&A charge, cost optimisation in prior years have started to pay off handsomely. Digitisation efforts saw lower marketing expense (-17% yoy) while renegotiated SLAs (some retired) in prior years led to lower maintenance cost (-7% yoy). Such is the savings, Digi incurred a one-off expense worth RM39.6m in 2Q18 to restructure its network operating model. Management expects better synergies from this restructuring effort which also matches the data-led and digital platform revenue model that it increasingly adopts.

Upgrades on improved expectations

Management tweaked its 2018 guidance which now expects flat service revenue (from 2017) and EBITDA margin sustained at 46-47% (Table 1). The 1H18 performance exceeded ours and consensus estimates mainly on better-than-expected service revenue growth and cost optimisation achieved. We raised our FY18-20F earnings by 2-9% while carrying out some minor housekeeping on our numbers. Still, we are cautious over the sector’s broader outlook albeit Digi’s lean operations would best serve the dynamic industry demands.

Resume with a BUY, RM4.85 TP

Digi made it back into the Shariah-compliant stocklist as at 25 May 2018 after addressing its conventional debt level. We resume coverage with a BUY and DCF-derived TP of RM4.85 (from: HOLD, RM4.70) based on 5.7% WACC, 0.5% terminal growth. Our TP implies 24.7x FY18F PE, lower than 26x PE previously implied. While cost optimisation has been very encouraging, we are cautious over possible intense competition.

Source: BIMB Securities Research - 16 Jul 2018