Digi’s 1H20 core net profit of RM631m (-14% YoY) was within expectations. Declared second DPS of 3.7 sen based on 100% payout. 2Q20 weakness was mainly due to MCO impacts: (1) attritions attributable to lower inbound subscriptions, involuntary churn and sustained sim consolidation; and (2) ARPU erosion because of decline in market spend and roaming revenue. FY20 guidance is revised with lower targets. We see a long recovery journey ahead despite the gradual MCO easing as the free 1GB daily quota will erode its data monetization opportunity until the end of FY20. Hence, we maintain HOLD call with unchanged DCF-derived TP of RM4.30.

In line. 2Q20 core net profit of RM299m (-10% QoQ, -24% YoY) brought 1H20’s total to RM631m (-14% YoY), which met expectations accounting for 47% of HLIB and consensus full year forecasts, respectively. 2Q20 one-off items include (1) RM13m from MFRS16 adjustment to site rental expense; (2) RM3m impact on the recognition of asset retirement obligation (ASO); and (3) their tax impact.

Dividend. Declared second interim tax-exempt (single-tier) dividend of 3.7 (2Q19: 5.0) sen per share, representing 100% payout ratio. This will go ex on 25 Aug. YTD DPS amounted to 7.9 (1H19: 9.3) sen per share.

QoQ. Top line declined 7% dragged by both mobile service revenue (-5%), device and other revenues (-22%). Within mobile service revenue, contributions from postpaid and prepaid contracted by -3% and -7%, respectively. The weakness was mainly due to MCO impact where (1) physical closure of touchpoints and local businesses impacted acquisition and market spend; and (2) closed borders led to restricted travel affecting roaming revenues. Despite fruitful cost savings measures, core net profit fell 10% as 1Q20 was lifted by interest rate swap savings of RM37m.

YoY. For the same reasons, revenue fell 6% with declines in mobile service revenue (-6%), device and other revenues (-8%). Within mobile service revenue, prepaid and postpaid revenues decreased by -1% and -10%, respectively. In turn, bottom line fell by 24% as the 7% savings in opex was insufficient to offset the higher COGS (+3%), D&A (+6%) and finance cost (+28%).

YTD. Similarly, top and bottom lines moderated by 2% and 14%, respectively.

Subscribers. Total base continued to slide in 2Q20 to 10.6m with attritions in both postpaid (-29k) and prepaid (-356k). This was stemmed from reduction of non-active users hampered by physical stores closure leading to lower inbound subscriptions, involuntary churn and sustained sim consolidation. Blended ARPU was stable at RM40 with postpaid and prepaid ARPUs at RM68 (-RM1 QoQ) and RM29 (-RM1 QoQ), respectively.

Revised FY20 guidance. (1) Service revenue: low single-digit decline (previously flat to low single digit decline); (2) EBITDA: medium single-digit decline (previously flat to low single digit decline); and (3) capex: similar to FY19 level (unchanged).

Forecast. Unchanged. Maintain HOLD with an unchanged DCF-derived TP of RM4.30, based on WACC of 6.0% and TG of 1%. We see a long recovery journey ahead despite the gradual MCO easing as the free 1GB daily quota will erode its data monetization opportunity until the end of FY20. While waiting for more clarity on NFCP and spectrum award, dividend yield of 3.9% should sustain share price in the near term

Source: Hong Leong Investment Bank Research - 21 Jul 2020