Digi’s FY20 core net profit of RM1.28m (-11% YoY) matched HLIB and consensus expectations. Declared forth DPS of 3.6 sen based on 100% payout. FY21 guidance was muted amidst challenging market environment. We see a long recovery journey ahead as the free 1GB daily quota will erode its data monetization opportunity. Based on latest operating data and guidance, we cut FY21-22 earnings by 18-19% leading to lower DCF-derived TP of RM4.00. Maintain HOLD.

Within expectations. 4Q20 core net profit of RM331m (+3% QoQ, -4% YoY) brought FY20’s total to RM1.28bn (-11% YoY), which matched HLIB and street expectations accounting for 99% and 100% of full year forecasts, respectively. FY20 one-off items include (1) RM13m from MFRS16 adjustment to site rental expense; (2) RM3m impact on the recognition of asset retirement obligation (ASO); (3) their tax impact; and (4) fixed asset write off amounted to RM51m.

Dividend. Declared forth interim tax-exempt (single-tier) dividend of 3.6 (4Q19: 4.4) sen per share, representing 100% payout ratio. This will go ex on 26 Feb. YTD DPS amounted to 15.6 (FY19: 18.2) sen per share.

QoQ. Top line declined 1% dragged by mobile service revenue (-2%) and wiped out the gain from device and other revenues (+3%). Within mobile service revenue, both prepaid and postpaid contributions were languish with -2% and -1%, respectively. However, core net profit improved 3% as the lower D&A sufficiently offset the higher net finance costs.

YoY. Revenue dropped 7% as both mobile service (-6%) and device and other (-12%) revenues were subpar. Despite lower D&A, core earnings contracted 4% due to higher cost structure and net finance costs.

YTD. Turnover inched down by 2% to RM6.2bn as mobile service revenue declined 4%, neutralizing the 11% gain from device and other revenues. Both postpaid and prepaid fell by 3% and 5%, respectively. Despite lower net interest costs (-14%), bottom line lost 11% attributable to higher cost structure and D&A.

Postpaid revenue at RM619m (-1% QoQ, -9% YoY) impacted by diminished roaming contributions and lower interconnect rates. Added 22k subs in 4Q20 along with QoQ ARPU erosion of RM1 to RM66. Cautious quality acquisitions and renewal activities to manage collection risk in view of softer affordability.

Prepaid sales softened to RM731m (-2% QoQ, -3% YoY). Lost 260k subs due to the shortfall in migrant segment although partly offset by a larger Malaysian base. ARPU also weakened by RM1 QoQ to RM32.

FY21 guidance. (1) Service revenue: low single digit % decline; (2) EBITDA: medium single digit % decline; and (3) capex-to-total revenue ratio: 14%-15%.

Forecast. After updating model based on latest operating data and guidance, FY21- 22 earnings forecasts were revised downward by 19.4% and 18.6%, respectively.

Maintain HOLD as we lower our DCF-derived TP from RM4.10 to RM4.00 using WACC of 5.0% (previously 6%) and unchanged TG of 1%, reflecting the downward earnings revision. We see a long recovery journey ahead as the free 1GB daily quota will erode its data monetization opportunity. While waiting for more clarity on Jendela and spectrum award, dividend yield of 3.6% should sustain share price in the near term.

Source: Hong Leong Investment Bank Research - 29 Jan 2021