Digi’s 1H19 core net profit of RM780m was in line. Declared second dividend of 5.0 sen per share. Top line fell as prepaid’s decline outweighed postpaid’s gain. However, bottom line was marginally enhanced by operational excellence and non-recurring cost benefit. It has lowered service revenue growth guidance to low single digit decline. Due to limited upside, we downgrade Digi to HOLD with unchanged TP of RM5.00. In the near term, the merger is the key focus.

Within expectations. 1H19 revenue of RM3.1bn translated into a core net profit of RM780m (pre-MFRS 16), accounting for 49% and 52% of HLIB and consensus full year forecasts, respectively.

Dividend. Declared second interim tax exempt (single-tier) dividend of 5.0 (2Q18: 4.9) sen per share, representing 100% payout based on post-MFRS 16 EPS. This will go ex on 30 Aug. 6M19 dividend amounted to 9.3 (6M18: 9.8) sen per share.

QoQ. Top line’s 3% expansion was mainly driven by device and other revenue as device sales volume increased by 16%. More importantly, service revenue finally notched up, albeit by less than 1% thanks to higher contribution from data which more than sufficient to offset voice’s decline. Leaner cost structure along with higher non recurring cost benefit had lifted EBITDA margin by 1ppt to 49%, leading to 13% improvement in core net profit.

YoY. Revenue fell 4% as postpaid expansion (+10%) was more than offset by the contractions in prepaid (-13%), device and other (-10%) revenues. However, core net profit gained by of 8% as a result of operational excellence and aided by non-recurring cost benefit.

YTD. For the same reasons mentioned above, turnover softened by 6% to RM3.1bn but core earnings managed to gain 1% to RM780m.

Postpaid. Sub base continued to climb in 2Q19, topping 2.9m after adding 71k QoQ while ARPU remained resilient QoQ at RM70. Postpaid revenue reached another record high at RM648m, up 10% YoY, accounted for 46% of total service revenue in 2Q19. This sustainable growth was achieved via the revamped PhoneFreedom 365 program, Digi Postpaid Family plans along with solid demand from prepaid conversions and B2B.

Prepaid. After two quarters of churn, Digi added 42k new subs and enlarged the base to 8.4m while ARPU was stable at RM29. This is attributable to the improved acquisition momentum post channel transformation in Mar 2019. With the focus in driving data adoption, internet subs rose to 6.7m or 79% of prepaid base fuelled by demand from worry-free internet plans now enhanced with voice bundles.

Guidance revision. Service revenue is expected to decline by low single digit instead of being flattish. While, status quo for EBITDA (low single digit decline) and capex (11%-12% of service revenue) guidance.

Forecast. Unchanged as results are in line.

Downgrade to HOLD (from Buy) due to limited upside from our unchanged DCF derived TP of RM5.00, based on WACC of 6.0% and TG of 1.5%. Near term share price movement will likely be influenced by the outcome of the merger between Telenor Asia and Axiata, which slated to be announced in 3Q19. Generous payout continues to sustain decent dividend yield of 4%.

Source: Hong Leong Investment Bank Research - 15 Jul 2019