Digi’s 1Q19 core net profit of RM366m was in line. Declared first dividend of 4.3 sen per share. Postpaid outperformed on the back of pre-to-post migration, while prepaid was lacklustre in a price focused market environment. Digi is making inroads into B2B segment and is a potential bright spot, in our view. We reiterate BUY with TP of RM5.00. Support on the downside should be driven by decent dividend yield of 4.4%.

Within expectations. 1Q19 revenue of RM1.5bn translated into a core net profit of RM366m (pre-MFRS 16), accounting for 23% and 24% of HLIB and consensus full year forecasts, respectively.

Dividend. Declared first interim tax exempt (single-tier) dividend of 4.3 (1Q18: 4.9) sen per share, representing 98% payout based on post-MFRS 16 EPS. This will go ex on 30 May.

QoQ. In this seasonally weaker quarter, top line lost 10% mainly attributable to the declines in prepaid (-6%), device and other (-52%) revenues while postpaid was flat. Lean cost structure has led to 30% and 2% savings in COGS and OPEX, respectively. As a result, bottom line only moderated by 3%.

YoY. Revenue fell 8% as postpaid expansion (+9%) was more than offset by the contractions in prepaid (-14%), device and other (-33%) revenues. However, core net profit only softened by a slower pace of 5% thanks to operational excellence as mentioned above.

B2B. Digi is making inroads into the enterprise segment after outbidding all rivals in recent PTP (Pelabuhan Tanjung Pelepas) private LTE tender. Channel checks reveal that there are more contracts in the pipeline, including standalone data network for Petronas oil platforms.

Postpaid. Sub base continued to climb in 1Q19, topping 2.9m after adding 50k QoQ while ARPU remained resilient QoQ at RM71. Postpaid revenue reached another record high at RM623m, up 9% YoY, accounted for 45% of total service revenue in 1Q19. The contribution could have been higher if the impact of accelerated contract asset amortisation (RM48) were excluded. In view of this side effect as a result of MFRS 15, Digi has diligently migrated from device subsidy to financing programme.

Prepaid. Blaming on the prolonged data competition intensity and its channel strategy revamp, sub base churned by 459k subs QoQ, down to a total of 8.4m while ARPU fell by RM1 QoQ to RM29. Although this as a small dampener, we believe that Digi’s re-energised game plan is a solid foundation towards building a stronger platform for sustainable growth.

Forecast. Although results were in line, we updated our projection based on FY18 audited account. As a result, FY19-20 EPS were revised by +1% and -7%, respectively. Maintain BUY call accompanied by DCF-derived TP of RM5.00 (previously RM5.10) based on WACC of 6.0% (5.8%) and TG of 1.5% (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 - 23 Apr 2019