Digi’s 6M18 core net profit of RM711m is in line. Declared second dividend of 4.9 sen per share. Despite the stronger top line, 6M18 core net profit was softer by due to one-off network operating model transition cost. Postpaid remained solid at the expense of prepaid. We are positive on (i) Shift in operation model; and (ii) MSAP beneficiary. We reiterate BUY with unchanged TP of RM5.10. Downside is limited by decent dividend yield of 4.3%.

Within expectations: 6M18 revenue of RM3.3bn was translated into a core net profit of RM711m (pre-MFRS 15), accounting for 51% and 48% of HLIB and consensus full year forecasts, respectively.

Dividend: Declared second interim tax exempt (single-tier) dividend of 4.9 (2Q17: 4.6) sen per share, representing 100% payout based on post-MFRS 15 EPS. This will go ex on 29 Aug. 6M18 dividend amounted to 9.8 sen per share vs. 9.3 sen in 6M17.

QoQ: Top line declined by 1% attributable to weaker non-core device and other revenues which fell by 12%. More importantly, service revenue was flat as data growth was sufficient to offset voice’s softness which further suppressed by lower mobile termination rate effective 1 Jan 2018. However, bottom line was up by 2% due improved cost discipline and lower D&A.

YoY: Revenue gained 4.2% thanks to solid postpaid growth and stronger prepaid data monetization, more than sufficient to offset the contractions of voice and messaging revenues. However, core net profit was flat due to the one-off network operating model transition cost which amounted to RM40m.

YTD: For the same reasons above, turnover rose 4% but core net profit declined by 3%.

Postpaid: Sub base continued to climb in 2Q18, topping 2.7m after adding 84k QoQ while ARPU softened RM1 QoQ to RM76, which partly diluted by Family plans (RM38 per month). Postpaid revenue reached another record high at RM619m, up 5% QoQ and 16% YoY.

Prepaid: Lost 182k subs QoQ to a base of 9m with a steady ARPU of RM32 blaming on the persistent prepaid to postpaid migration. However, prepaid internet continue to experience strong demand surging 21% YoY to RM405m accounting for 47% of prepaid revenue.

Lower D&A: (1) Renewal pricing for 2100MHz is lower than previous acquisition price from TIME dotCom, hence lower amortization of RM17m will be recurring going forward; (2) Depreciation reversal on fully depreciated assets which amounted to RM20-25m and expect some spill over into 3Q18.

Reiterating optimism: We are positive on its new network operating model and believe that this is a sustainable business structure and will greatly improve efficiency over the longer term. We also view this Stockholm-based managed service provider capable of mitigating any trade ban risk from its single-sourced Chinese vendor.

Forecast: Maintain.

Reiterate BUY based on unchanged DCF-derived TP of RM5.10 based on WACC of 5.8% and TG of 0.5%. Still our favourite due to: (1) MSAP beneficiary; (2) Improved efficiency with access to low frequency band and managed services; (4) Strong balance sheet to support spectrum fee; and (5) Prudent management.

Source: Hong Leong Investment Bank Research - 16 Jul 2018