Results

• 1Q17 turnover of RM1.6bn and core net profit of RM373.1m were disappointments, accounting for 21.7% and 22.7% of HLIB and street?s FY estimates, respectively.

Deviations

• Prepaid performance was weaker-than-expected due to the compounded effect of huge churn and significant ARPU decline.

Dividends

• Declared 1st interim tax exempt (single-tier) dividend of 4.7 sen per share (1Q16: 5.1 sen), representing 98% payout, which goes ex on 29 May.

Highlights

• QoQ: Despite seasonal weakness, turnover was down by 5.7% mainly due to prepaid?s subpar performance of -8.8%, eclipsed postpaid?s growth of 1.8%. However, PAT was flat as effective tax rate reverted to 26.8% vs. 4Q16?s 31.1% which was associated to one-off RM35m prior tax provision. After adjustment, core net profit actually fell by 8.9%.
• YoY: For the same reason, top line contracted 4.8% but EBITDA strengthened by 2.5% as traffic charges were reduced by 32%. With higher D&A (larger asset base) and interest expense (additional debt raised for spectrum fees), core net profit fell by 6.5%.
• Postpaid: sub base continued to climb, topping 2.2m after adding 90k in 1Q17 while ARPU moderated RM2 QoQ to RM79. Yet, postpaid revenue stood at record high at RM520m, upped 1.8% QoQ and 12.1% YoY. Internet subscription now account for 87.8% of postpaid base.
• Prepaid: Repositioned to focus on internet proposition and sustainable revenue in order to improve margins. This has led to major attrition of 613k as DiGi scaled down acquisition from low-margin segments and rationalized legacy services, including IDD, 3rd party contents and pay-per-use. ARPU was eroded RM2 QoQ to RM32.
• With LTE and LTE-A population coverage at 85% and 42% respectively supported by 7,700km fiber network, DiGi has completed spectrum refarming and LTE900 deployment.

Risks

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

Forecasts

• Updated model based on latest operating data and guidance which in turn lead to FY17-18 EPS revisions by -2.3% and +0.9%, respectively.

Rating

HOLD ↓ , TP: RM5.10 ↓

• Still our favorite among the large cap telcos due to its under- leveraged balance sheet capable of supporting spectrum fee with steady dividend payout. Low frequency band would enhance its efficiency.

Valuation

• Downgrade from BUY to HOLD after cutting our TP by 10.5% from RM5.70 to RM5.10, reflecting earning forecast revision and valuation rollover to FY18.
• Our fair value is derived based on DCF with WACC of 6.0% (previously 5.0%) and TG of 0.5%.

Source: Hong Leong Investment Bank Research - 02 May 2017