Results

• FY16 turnover of RM6.6bn was translated into a much anticipated core net profit of RM1.6bn, accounting for 97.4% and 97.8% of HLIB and street’s FY estimates, respectively.

Deviations

• None.

Dividends

• Declared 4th interim tax exempt (single-tier) dividend of 4.8 sen per share (4Q15: 4.9 sen), representing 100% payout, which goes ex on 1 Mar. YTD dividend amounted to 20.9 sen per share (FY15: 22.0 sen) which is within expectation.

Highlights

• QoQ: While top line growth was largely due to non-core device and other revenues, adjusted bottom line fell due to higher expenses in device (iPhone 7), traffic (stronger USD), sales and marketing and higher finance cost (additional debt raised for spectrum fees).
• YoY: Despite lower device sales, the weakness in revenue is attributable to prepaid voice revenue. Earnings also fell in tandem after adjustments for one-off items.
• FY16: Excluding device sales, service revenue actually fell by only 1.9% attributable to full year post-price war and GST impact. Although cost rationalization initiatives were fruitful, core net profit was dragged by higher D&A and interest cost.
• Postpaid: solid acquisition momentum with record high net adds at 105k to 2.1m subs. Internet subs climbed steadily to 1.8m or 87% on the back of 85% smartphone penetration. Coupled with strengthening ARPU to RM81 (+RM1 qoq), DiGi registered best postpaid revenue growth of 4.5% qoq and 13.6% yoy to RM511m in 4Q16. There is a heightened demand for new plans (especially entry level) and bundled devices thanks to its unique proposition on weekend and border roaming flexibility.
• While prepaid base shrunk at a slower rate, ARPU was steady implying those attritions were low value subs. Two newly-introduced plans have gained solid interest among the young and entertainment-oriented subs offering best video, music and gaming experiences yet affordable.
• 2017 guidance: 2016 Actual 2017 Guidance Service revenue (RM) 6,226m ~ 2016’s EBITDA margin 45% ~ 2016’s CAPEX to service revenue ratio 12.5% 11%-13%

Risks

• Regulatory risks, irrational competition, exorbitant spectrum fee and unable to monetize data revenue.

Forecasts

• Unchanged.

Rating

BUY ↔, TP: RM5.70 ↔

• Still one of our favorites for the sector due to its under- leveraged balance sheet capable of supporting spectrum fee with steady dividend payout. Low frequency band would enhance its efficiency.

Valuation

• Reiterate BUY with unchanged DCF-derived TP of RM5.70 based on WACC of 5.0% and TG of 0.5%.

Source: Hong Leong Investment Bank Research - 24 Jan 2017