Digi’s 2Q21 core net profit of RM281m (+6% QoQ, -6% YoY) matched HLIB but missed consensus expectation. Declared second DPS of 3.6 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 DCFderived TP of RM4.00.

Within HLIB’s but below street. 2Q21 core net profit of RM281m (+6% QoQ, -6% YoY) brought 1H21 total to RM546m (-14% YoY) which matched HLIB’s full year forecast at 49% but missed consensus’ at 47%. One off adjustment includes a nonrecurring opex after tax adjustment which amounted to RM1m.

Dividend. Declared second interim tax-exempt (single-tier) dividend of 3.6 (2Q20: 3.7) sen per share, representing 100% payout ratio. This will go ex on 25 Aug. YTD DPS amounted to 7.0 sen vs. 1H20’s 7.9 sen.

QoQ. Top line gained 4% mainly boosted by device and others revenue (+31%) while service revenue was flat. Within service revenue, both prepaid and postpaid contributions were higher by 1% each, more than sufficient to offset the dismay showing from digital revenue (-8%). As a result, core net profit grew 6% due to lower finance costs (-33%) and corporate tax rate despite higher D&A (+5%).

YoY. Revenue rose 11% as both service (+2%) and device and other (+106%) revenues trended upwards. Within service revenue, prepaid (+3%) and digital (+42%) growths was partly negated by postpaid’s contraction (-2%). However, core earnings fell by 6% to RM281m due to higher opex (+8%) and corporate tax rate.

YTD. For the same reasons above, top and bottom lines +5% and -14% to RM3.2bn and RM546m, respectively.

Postpaid revenue at RM623m (+1% QoQ, -2% YoY) amid diminished roaming contribution. Added 95k subs in 2Q21 along with QoQ ARPU erosion of RM1 to RM64 partially due to roaming ARPU. Increasing acquisition and retention momentum on the back of renewed portfolio: (i) higher take-up in mid-level plans; (ii) positive response to service add-on contracts; and (iii) strong demand for entry-level plans via PRIHATIN.

Prepaid sales strengthened to RM643m (+1% QoQ, +3% YoY). Lost 128k subs due to the shortfall in migrant segment although partly offset by a larger Malaysian base. However, ARPU also strengthened by RM1 QoQ to RM34.

CAPEX. Outlay of RM196m or 12% of total 2Q21 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 to 92% and 75%, respectively.

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 - 19 Jul 2021