Digi’s 1Q21 core net profit of RM264m (-20% QoQ, -21% YoY) matched HLIB and consensus expectations. Declared forth DPS of 3.4 sen based on 100% payout. Sequentially, postpaid expanded sub base at the expense of ARPU erosion while prepaid continued to see attritions which may artificially lifted ARPU. We see a long recovery journey ahead as the free 1GB daily quota will erode its data monetization opportunity. Maintain HOLD with unchanged DCF-derived TP of RM4.00.

Within expectations. 1Q21 core net profit of RM264m (-20% QoQ, -21% YoY) matched HLIB and street expectations accounting for 24% and 23% of full year forecasts, respectively.

Dividend. Declared first interim tax-exempt (single-tier) dividend of 3.4 (1Q20: 4.2) sen per share, representing 100% payout ratio. This will go ex on 25 May.

QoQ. Top line declined 1% dragged by mobile service revenue (-1%) and wiped out the gain from device and other revenues (+1%). Within mobile service revenue, both prepaid and postpaid contributions were languish with -0.3% each from softer gaming activities despite sustained good commercial momentum. Improved device and other revenues from encouraging take-ips for value accretive PF365 plans. However, core net profit fell 20% due to higher opex (+6%), D&A (+12%) and net finance costs (+10%).

YoY. Revenue dropped 1% as device and other (+23%) revenues failed to offset the contraction in service revenue (-4%). Within mobile service revenue, both prepaid and postpaid revenues declined 7% and 6% to RM640m and RM617m, respectively due to customer spend optimization. Despite lower opex (-2%), core earnings plunged 20% due to higher COGS (+5%), D&A (+1%) and net finance costs (+393%).

Postpaid revenue at RM617m (-0.3% QoQ, -6% YoY) impacted by diminished roaming contribution. Added 46k subs in 1Q21 along with QoQ ARPU erosion of RM1 to RM65 partially due to roaming ARPU. Targeted acquisition and retention strategies via the newly launched Digi Postpaid portfolio, where (1) new mid-to-high ARPU plans for acquisition; and (2) new service add-on contracts for retention.

Prepaid sales softened to RM640m (-0.3% QoQ, -7% YoY). Lost 237k subs due to the shortfall in migrant segment although partly offset by a larger Malaysian base. However, ARPU also strengthened by RM1 QoQ to RM33.

CAPEX. Outlay of RM157m or 10% of total revenue to support network rollouts and site deployments. Close monitoring of capex allocation by prioritising near-term modernisation initiatives. LTE and LTE-A population coverage improved by 1% and 2%, respectively. At the same time, Digi continued to invest in fibre and achieved 10,000km (+1% QoQ, +5% YoY) as end of 1Q21.

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

Forecast. Unchanged.

Maintain HOLD with unchanged DCF-derived TP of RM4.00 using WACC of 5.0% and TG of 1%. 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 merger and 5G SPV, dividend yield of 3.4% should sustain share price in the near term.

Source: Hong Leong Investment Bank Research - 3 May 2021