9M19 in line but lowers guidance again

Digi’s 9M19 core net profit of RM1.1bn was in line. Declared third dividend of 4.5 sen per share. Top line fell as prepaid’s decline outweighed postpaid’s gain. As a result, bottom line was weaker as despite the non-recurring cost benefits. It has lowered EBITDA growth guidance to low to mid-single digit decline. We maintain HOLD call with unchanged TP of RM5.00. While waiting for more clarity on NFCP and spectrum award, dividend yield of 4% should sustain share price in the near term.

Within expectations. On pre-MFRS 16 basis, 3Q19 core net profit of RM362m (-13% QoQ, -8% YoY) brings 9M19’s total to RM1.1bn (-2% YoY), which met expectations accounting for 72% and 76% of HLIB and consensus full year forecasts, respectively. One-off adjustments include non-recurring cost benefit and prior year tax expenses which amounted to RM4m.

Dividend. Declared third interim tax exempt (single-tier) dividend of 4.5 (3Q18: 5.0) sen per share, representing 98% pay-out based on post-MFRS 16 EPS. This will go ex on 21 Nov. 9M19 dividend amounted to 13.8 (6M18: 14.8) sen per share.

QoQ. Top line’s 1% expansion was mainly driven by postpaid (+3%), device and other (+1%) sales, which more than sufficient to offset prepaid’s decline (-1%). However, EBITDA shrunk by 1% in the absence of non-recurring cost benefits which amounted to RM62m. Coupling with higher effective tax rate of 27% (2Q19: 20%), core net profit fell 13% to RM362m.

YoY. Revenue fell 2% as postpaid gain (+10%) was overshadowed by the declines in prepaid (-11%), device and other (-8%) revenues. In terms of product, voice revenue plunged by 23% while data only added 9%. Subsequently, core earnings fell by 8% along with higher D&A (+4%) in line with higher asset base.

YTD. For the same reasons mentioned above, turnover softened by 5% to RM4.6bn. Despite the non-recurring cost benefits which amounted to RM101m in 9M19, preMFRS 16 EBITDA fell by 4% to RM2.2bn. However, bottom line only moderated by 2% to RM1.1bn thanks to lower interest and tax expenses, while partly mitigated by higher D&A.

Postpaid. Sub base continued to climb in 3Q19, topping 3.0m after adding 67k QoQ while ARPU strengthened by RM1 QoQ to RM71. Postpaid revenue reached another record high at RM666m, up 10% YoY, accounted for 47% of total service revenue in 3Q19. This sustainable growth was achieved via sharper focus to capture customers’ demand through easy device ownership programme (PhoneFreedom 365), postpaid family plans and pre-to-post conversions.

Prepaid. Digi lost 101k subs and ended 3Q19 with a base of 8.3m while ARPU was stable at RM29. Price-focused competition in the market is not expected to subside in the near term.

Updated guidance. Service revenue’s low single digit decline remained but EBITDA is projected to decline by low to mid-single digit (instead of low single digit) and capex at 12-13% (previously 11-12%) of service revenue.

Forecast. Unchanged as results are in line.

Maintain HOLD with unchanged DCF-derived TP of RM5.00, based on WACC of 6.0% and TG of 1.5%. While waiting for more clarity on NFCP and spectrum award, dividend yield of 4% should sustain share price in the near term.

Source: Hong Leong Investment Bank Research - 21 Oct 2019