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.

• 4Q18 core earnings grew 8% qoq and 1% yoy underpinned by solid growth for contracted device bundle plans.

• FY18 core earnings eased marginally by -1% on higher effective tax rate but met ours and consensus estimates with better core EBITDA margin due to cost optimisation.

• Maintain BUY with a DCF-derived TP of RM 5.00. We view Digi has better prospect in current stable competition on the back of uplift in data monetisation and cost optimisation.

Solid momentum with device bundle plans

Device revenue posted a splendid growth (+103% qoq, +49% yoy) arising from the surge in demand for contracted device bundle plans amidst the released several flagship smartphones in the market in 4Q18. This led to strong growth for the postpaid segment; subs grew by +75k qoq and +325k yoy to 2.8 million while service revenue rose +4% qoq and +15% yoy to RM1.5bn. These more than offset the decline in prepaid service revenue and boosted overall revenue growth.

Fruitful cost optimisation in FY18

Digi reduced its traffic expenses substantially by -16.5% yoy amidst lower mobile termination rate (MTR) and voice calls. It also streamlined marketing and network operation activities as both expenses fell -13% and -11% respectively. Data monetisation and ARPU was boosted by rechannelling device subsidy resources to retain existing and acquire new subs via its bundled plans. As a result, EBITDA margin expanded by 0.7 ppts yoy to 46.9%.

Expedite network deployment and upgrades

In view of increasing data demand (+11% qoq, 58% yoy), it expedited network deployment and upgrades to 15.5% of service revenue in 4Q18 (3Q18: 9%, 4Q17: 11%). The capex investment was mainly on fibre deployment (from 8,300km to 8,400km) and LTE-A technology (from 61% to 65%). Notwithstanding, it still met our dividend expectations of 19.6 sen DPS for FY18.

BUY call with TP of RM5.00

We maintain our BUY call on Digi with DCF-derived TP of RM5.00. Its contracted device bundling plans has successfully increased postpaid subscriber base while providing an uplift in ARPU as well as data monetisation. Coupled with cost optimisation and our view of stable market competition, we believe Digi's earnings prospects looks bright. Our forecast implies 0.5% earnings CAGR over 2018-20F.

Source: BIMB Securities Research - 25 Jan 2019