Digi’s FY21 core net profit of RM1.1bn (-4% YoY) was in line. Declared forth DPS of 3.9 sen based on 100% payout. Completed 3G shutdown which led to increased VoLTE adoption and better customer experience . FY22 sales guided to return to growth muted EBITDA guidance implies cost pressure. Maintain HOLD with unchanged DCF-derived TP of RM4.00. We see a long recovery journey ahead as the free 1GB daily quota will erode its data monetization opportunity.

Within expectations. 4Q21 core net profit of RM253m (-14% QoQ, -7% YoY) brought FY21 total to RM1.1bn (-4% YoY) which matched HLIB’s and consensus full year forecast at 99% and 95%, respectively. FY21 one off items include (i) clean-up of sourcing contracts (+RM5m); (ii) depreciation clean up (+RM6m) and non-recurring opex after tax adjustment (+RM1m); (iii) provisions made in previous quarters for networks and doubtful debts (-RM18m); and (iv) reversal of tax claim (-RM51m).

Dividend. Declared forth interim tax-exempt (single-tier) dividend of 3.9 (4Q20: 3.6) sen per share, representing 100% payout ratio. This will go ex on 2 Mar. FY21 DPS amounted to 14.9 sen vs. FY20’s 15.6 sen.

QoQ. Top line was flat as growth in device and others revenue (+9%) was offset by service revenue (-2%). Within service revenue, both postpaid (-15) and prepaid (-3%) revenues declined and wiped out the expansion in digital revenue (+3%). Despite lower D&A (-5%), core net profit fell 14% to RM253m attributable to higher COGS (+8%), opex (+4%) and net finance cost (+17%).

YoY. Revenue inched up 1% as the growth in device and other revenue (+25%) neutralized the decline in service revenue (-2%). Within service revenue, the contractions in prepaid (-3%) and digital (-25%) were more than sufficient to offset postpaid’s gain (+2%). Despite the lower net interest cost (-14%), core earnings fell by 7% impacted by higher COGS (+6%), opex (+6%) and D&A (+11%).

YTD. Top line gained 3% to RM6.3bn supported by higher devices and other sales (+37%) while service revenue lost 2%. In turn, bottom line declined 4% to RM1.1bn due to higher cost structure, D&A (+3%) and net finance costs (+18%).

Subscriber. Added 50k postpaid subs in 4Q21 along with QoQ ARPU erosion of RM1 to RM62 due to higher entry-level mix. Lost 97k prepaid subs QoQ while ARPU also declined RM1 QoQ to RM33.

Network. 4G LTE and LTE-A coverage at 93% and 76%, respectively alongside extensive fibre network of >10,000km. Completed 3G shutdown which led to increased VoLTE adoption and better customer experience.

FY22 guidance. (1) Service revenue: return to growth underpinned by momentum in postpaid, B2B and fibre; (2) EBITDA to be around FY21 level (RM3bn); and (3) capex/total revenue to be around FY21 level (RM814m).

Forecast. Updated model base on FY21 figures. In turn, FY22-23 earnings were revised by -2% and +5%, respectively. Maintain HOLD with unchanged DCF-derived TP of RM4.00 using WACC of 5.7% (previously 5%) 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 3.3% should sustain share price in the near term.

Source: Hong Leong Investment Bank Research - 31 Jan 2022