Digi’s 1Q20 core net profit of RM322m (-3% QoQ / YoY) was a disappointment due to higher-than-expected D&A. Declared first DPS of 4.2 sen, 98% pay-out. Service revenue was lacklustre on the back of stubborn attritions and ARPU erosion. Postpaid revenue registered first sequential drop since 3Q16 due to lower roaming and interconnect contributions. FY20 guida nce is subject to revision post Covid-19. After lowering our forecasts, we maintain HOLD call with lower a TP of RM4.30. While waiting for more clarity on NFCP and spectrum award, dividend yield of 3.8% should sustain share price in the near term.

Below expectations. 1Q20 core net profit of RM332m (-3% QoQ / YoY) came below ours and consensus expectations, accounting for 21.7% and 23.5% of full year forecasts, respectively. The culprit was largely due to higher-than-expected D&A.

Dividend. Declared first interim tax exempt (single-tier) dividend of 4.2 (1Q19: 4.3) sen per share, representing 98% pay-out ratio. This will go ex on 28 May.

QoQ. Top line declined 7% as device and other sales fell 28% from the seasonally strong 4Q. Mobile service revenue also moderated by 3% as both postpaid (-4%) and prepaid and digital (-3%) contributions softened. However, bottom line contracted by a slower pace of 3% as lower finance cost (-75%) was more than sufficient to offset the increase in D&A (+5%). In 1Q20, Digi saved RM37m of interest expense thanks to its interest rate swap positions which is evaluated on the quarterly basis.

YoY. Revenue gained 3% driven by device and other revenues (+49%) while mobile service revenue was flat. Within mobile service revenue, postpaid’s 5% growth was entirely neutralised by prepaid and digital’s 5% fall. Nonetheless, core net profit fell by 3% to RM332 dragged by higher cost structure, namely in materials (+63%), traffic (+11%), O&M (+12%) and regulatory fees (+3%).

Subscribers. Total base continued to slide in 1Q20 to 11m whereby prepaid internet and non-internet subs churned by 300k and 100k respectively, more than offset postapid’s 100k net adds. Although acquisition activities were restricted due to MCO, active subs were steady with continued prepaid-to-postpaid migration, plan upgrades and device contracting. Blended ARPU eased RM1 QoQ to RM40 with postpaid and prepaid ARPUs at RM69 (-RM3 QoQ) and RM30 (flat QoQ), respectively.

Postpaid. Contribution shrunk sequentially (-4% QoQ) for the first time since 3Q16 despite sub gain mainly due to the declines in interconnect and roaming revenues. Based on MCMC’s 2017 MSAP, interconnect rates are cut by half from 1.96 sen in 2019 to 0.99 sen in 2020.

FY20 guidance. To revisit when more clarity is available on the timing of MCO uplift, Covid-19 and economic outlook. Status quo as of now: (1) service revenue to be flat to low single digit decline; (2) EBITDA to be flat to low single digit decline; and (3) capex will be similar to FY19’s (RM753m).

Forecast. Apart from the deviation mentioned above, we also tweak revenue and cost assumptions in view of the challenging market landscape amid Covid-19. In turn, FY20-22 earnings were lowered by 4%, 7% and 6%, respectively. Maintain HOLD with a lower DCF-derived TP of RM4.30 (from RM4.50), based on WACC of 6.0% and TG of 1%. While waiting for more clarity on NFCP and spectrum award, dividend yield of 3.8% should sustain share price in the near term.

Source: Hong Leong Investment Bank Research - 24 Apr 2020