Digi’s 9M18 core net profit of RM1.1bn was in line. Declared second dividend of 5.0 sen per share. Despite the stronger top line, 9M18 core net profit was softer by due to network operating model transition cost and IRS gain in 9M17. We reckon that price regulation is unlikely to be adopted in the mobile sector. Fibre wholesale may be a new income stream. We reiterate BUY with unchanged TP of RM5.10. Downside is limited by decent dividend yield of 4%.

Within expectations. 9M18 revenue of RM4.9bn translated into a core net profit of RM1.1bn (pre-MFRS 15), accounting for 77% and 73% of HLIB and consensus full year forecasts, respectively.

Dividend. Declared second interim tax exempt (single-tier) dividend of 5.0 (3Q17: 4.9) sen per share, representing 100% payout based on post-MFRS 15 EPS. This will go ex on 21 Nov. 9M18 dividend amounted to 14.8 (9M17: 14.2) sen per share.

QoQ. Top line declined by 1% mainly attributable to weaker prepaid voice which fell 7%, more than sufficient to offset data’s 2% expansion. However, bottom line was up by 3% as 2Q18 was impacted by one-off network operating model transition cost which amounted to RM40m.

YoY. Revenue gained 2% thanks to solid postpaid growth and stronger prepaid data monetization, more than sufficient to offset the contractions of voice and messaging revenues. Nevertheless, core net profit was lower by 4% as 3Q17 was artificially boosted by fair value gains from interest rate swap (IRS).

YTD. Turnover rose 3% for the same reasons mentioned above. But, core net profit declined by 3% after taking into account of the transition cost and IRS gain.

Postpaid. Sub base continued to climb in 3Q18, topping 2.7m after adding 75k QoQ while ARPU was stable at RM76. Postpaid revenue reached another record high at RM640m, up 3% QoQ and 15% YoY. It accounted for 43% of total service revenue in 3Q18.

Prepaid. After 4-consecutive quarters of churn, sub base finally grew after adding 69k subs QoQ, reaching a total of 9.1m. ARPU contracted by RM1 QoQ to RM31 amid data pricing aggression. Prepaid internet revenue continued to experience strong demand gaining 10% YoY to RM399m accounting for 48% of prepaid revenue.

D&A to normalize. Recall that 2Q18’s D&A was boosted by depreciation reversal and there was a spill over into 3Q18 which amounted to RM10-13m. Going forward, D&A run rate should normalize back to circa RM205m level.

Concern on price regulation. We opine that price fixing will be contained within the fixed segment and not likely to spread into the mobile space given the intense rivalry. Digi’s 8,300km fibre is also subject to MSAP and may eventually lead to new revenue stream, if materialized.

Forecast. Maintain as Results Are in Line.

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; (3) managed services; (4) strong balance sheet to support spectrum fee; and (5) prudent management.

Source: Hong Leong Investment Bank Research - 18 Oct 2018