Digi’s FY19 core net profit of RM1.5bn (-3% YoY) was a disappointment to us but matched consensus expectation. Declared forth DPS of 4.4 sen. Top line was flat as prepaid’s decline offset postpaid’s gain. Bottom line was weaker dragged by higher cost structure. FY20 guidance implies more weakness ahead. We maintain HOLD call with lower TP of RM4.50. While waiting for more clarity on NFCP and spectrum award, dividend yield of 4% should sustain share price in the near term.

Below expectations. On pre-MFRS 16 basis, 4Q19 core net profit of RM353m (-3% QoQ, -7% YoY) brought FY19’s total to RM1.5bn (-3% YoY), which came below our expectation accounting for 94% of full year forecasts but met consensus’ at 101%. The culprit was largely due to higher-than-expected D&A. One off adjustments were solely due to MFRS 16 impacts.

Dividend. Declared forth interim tax exempt (single-tier) dividend of 4.4 (4Q18: 4.8) sen per share, representing 100% pay-out based on post-MFRS 16 EPS. This will go ex on 27 Feb. FY19 dividend amounted to 18.2 (FY18: 19.6) sen per share.

QoQ. Top line’s 7% expansion was mainly driven by postpaid (+2%), device and other (+62%) sales, which more than sufficient to offset prepaid’s decline (-1%). However, EBITDA shrunk by 4% on the back of higher cost of materials (+74%), traffic charges (+8%) and other expenses (+16%). In turn, core net profit fell 3% to RM353m.

YoY. Revenue was flat as gains in postpaid (+9%), device and other revenues (+2%) were overshadowed by the declines in prepaid (-10%). In terms of product, voice revenue plunged by 17% while data only added 6%. Subsequently, core earnings fell by 7% attributable to higher cost of materials (+20%), USP fees (+10%) and other expenses (+8%) despite lower staff cost (-32%).

YTD. For the same reasons mentioned above, turnover softened by 4% to RM6.3bn. Despite the non-recurring cost benefits which amounted to RM125m in FY19, EBIT fell by 6% to RM2.1bn. However, bottom line only moderated by 3% to RM1.5bn thanks to lower tax rate at 24% (FY18: 26%).

Postpaid. Sub base continued to climb in 4Q19, surpassing 3m after adding 39k QoQ while ARPU strengthened by RM1 QoQ to RM72. Postpaid revenue reached another record high at RM680m, up 9% YoY, accounted for 47% of total service revenue in 4Q19. This sustainable growth was on the back of good trajectory on quality acquisition, customer re-contracting and upgrades via PF365 and Family plans.

Prepaid. Digi lost 88k subs and ended 4Q19 with a base of 8.2m while ARPU inched up RM1 QoQ to RM30. Although non-internet prepaid revenue was stable at RM334m in 4Q19, Digi is putting more emphasis to entice those subscribers to be data or postpaid users.

FY20 guidance. Taking MFRS 16 into consideration, service revenue and EBITDA are projected to be flat to low single digit decline. Capex will be similar to FY19’s (RM753m).

Forecast. In view of the results and unexciting guidance, we cut FY20-21 earnings by 13% and 9%, respectively after tweaking revenue and margin assumptions. Maintain HOLD with a lower DCF-derived TP of RM4.50 (from RM5.00), based on WACC of 6.0% and TG of 1% (previously 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 - 29 Jan 2020