• 3Q18 core earnings fell 7% qoq and 4% yoy while 9M18 eased by 1% on higher depreciation and interest expense.

• Nevertheless, 9M18 core earnings were broadly inline with ours and consensus estimates at 74% and 75% respectively.

• On this note, it declared third interim DPS of 5.0 sen, totaling 14.9 sen YTD which represent 99% payout ratio.

• We retain our BUY call with revised DCF-derived TP of RM 5.00 (from RM 4.85) after rolling over our valuation.

Strong demand for postpaid device bundles

Postpaid revenue continue to grow (+3% qoq, +15% yoy) with higher subscriber base (+75k qoq, +335k yoy) and stronger data revenue (+5% qoq, +23% yoy). This was mainly on strong demand for new high value postpaid plan with device bundle. On the flip side, prepaid revenue fell (-7.4% qoq, -6.4% yoy) owing to conversion into postpaid and lower voice revenue. Overall, the service revenue was marginally lower (-0.6% qoq, -0.1% yoy) in tandem with the easing legacy voice revenues.

Cost restructuring effort remains on-going

As part of its cost optimisation program, it lowered marketing expense (-3% qoq, -9% yoy) and staff cost (-4% qoq, -15 yoy) while boosting its digitalization capabilities. Resources are channelled towards upgrading its network and expand LTE-A coverage which is now at 61% (2Q18: 58%). We believe this could lead to further demand growth for data and enable better monetisation to boost ARPU.

Minimal regulatory risk for mobile operators

Management opined that mobile operators would see less interference from regulators due to an already healthy competition in the mobile space. It believes the 700MHz spectrum allocation would be called off as it would likely be used for 5G trials. Digi expressed its interest to part take in the testing subject to technology, spectrum, market and device readiness; tests are expected to be rolled out in Nov 2018. Management indicated it will review MSAP agreement before deciding on its 8,300 km fibre network. It remains committed to make in roads in the Enterprise space with two new offerings for customer’s business digitalization; OMNI and Industrial Valet.

Retained BUY call with revised TP of RM5.00

We retained our BUY call on Digi with revised DCF-derived TP of RM5.00 (from RM4.85) after rolling our DCF model 1-year forward. Digi's digitalisation endeavour has started to pay off given its resilient margins amidst the competitve backdrop. We believe there is more to come from this platform in the form of product innovation which would enable Digi to enhance its data monetisation.

Source: BIMB Securities Research - 18 Oct 2018