Digi’s 9M20 core net profit of RM952m (-13% YoY) missed our expectation but inline with consensus. Declared third DPS of 4.1 sen based on 100% payout. FY20 guidance is revised again 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. Cut FY20-22 earnings by 3-4% leading to lower DCF-derived TP of RM4.10. Maintain HOLD.

Below expectation. 3Q20 core net profit of RM321m (+7% QoQ, -10% YoY) brought 9M20’s total to RM952m (-13% YoY), which missed our expectation accounting for 71% of full year forecasts, but matched consensus at 74%. We had under forecasted materials cost. No one-off items in 3Q20.

Dividend. Declared third interim tax-exempt (single-tier) dividend of 4.1 (3Q19: 4.5) sen per share, representing 100% payout ratio. This will go ex on 17 Nov. YTD DPS amounted to 12.0 (9M19: 13.8) sen per share.

QoQ. Top line grew 9% driven by both mobile service revenue (+4%), device and other revenues (+52%). Within mobile service revenue, prepaid’s contribution (+10%) was more than sufficient to offset the weakness in postpaid (-2%). In turn, core net profit gained 7% to RM321m on the back of lower D&A (-5%) and finance cost (-37%).

YoY. Revenue gained 1% supported by increase in device and other revenue (+38%) while mobile service revenue fell (-3%). The latter’s subpar performance was dragged by postpaid results (-6%) while prepaid was flat. Despite lower finance cost (-21%) and lower effective tax rate (26% vs. 3Q19’s 27%), core earnings fell by 10% impacted by higher expenses in material, staff and credit loss allowances.

YTD. Turnover inched down by 1% to RM4.6bn as mobile service revenue declined 3%, neutralizing the 25% gain from device and other revenues. Both postpaid and prepaid fell by 1% and 5%, respectively. Despite lower interest cos (-20%) and tax (- 11%), bottom line lost 13% attributable to higher cost structure (+7%) and D&A (+5%).

Postpaid revenue at RM626m (-2% QoQ, -6% YoY) impacted by diminished roaming contributions and lower interconnect rates. Lost 10k subs in 3Q20 along with QoQ ARPU erosion of RM1 to RM67. Cautious quality acquisitions and renewal activities to manage collection risk in view of softer affordability.

Prepaid was the bright spot with sales of RM668m (+7% QoQ, -10% YoY). Added 67k subs with stronger ARPU of +RM4 QoQ to RM33. Recovery in Malaysian base of 6% against pre-MCO period to offset the decline in the migrant segment.

FY20 guidance revised again. (1) Service revenue: low-to-medium single digit % decline (previously low single-digit decline); (2) EBITDA: medium-to-high single digit% decline (previously medium single-digit decline); and (3) capex: similar to FY19 level (unchanged) excluding asset retirement obligations.

Forecast. Tweaked forecast based on deviations mentioned above. As a result, FY20-22 EPS are lowered by 3-4%, respectively.

Maintain HOLD despite a lower DCF-derived TP of RM4.10 (based on WACC of 6.0% and TG of 1%) reflecting the downward earnings revision. 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 Jendela and spectrum award, dividend yield of 3.8% should sustain share price in the near term.

Source: Hong Leong Investment Bank Research - 19 Oct 2020