Digi’s 1Q22 core net profit of RM282m (+11% QoQ, +4% YoY) was in line. Declared first DPS of 2.9 sen based on 97% payout. Overall, the improvements were thanks to operational excellence and lower D&A. Postpaid maintained positive trajectory at the expense of prepaid amid pre-to-post migration as well as the weakness in migrant segment. FY22 service revenue guided to return to growth while muted EBITDA projection implies cost pressure. Maintain HOLD with unchanged DCF derived TP of RM4.00. While waiting for more clarities on merger and 5G structure with DNB, dividend yield of 3.8% should sustain share price in the near term.

Within expectations. 1Q22 core net profit of RM282m (+11% QoQ, +4% YoY) matched HLIB’s and consensus full year forecast at 24%, respectively. 1Q21 one off items include (i) one-time impairment amounting to RM12m; and (ii) prosperity tax which is estimated to be RM34m.

Dividend. Declared first interim tax-exempt (single-tier) dividend of 2.9 (1Q21: 3.4) sen per share, representing 97% payout ratio. This will go ex on 30 May.

QoQ. Top line was down 4% to RM1,522m as both service and device revenues fell by 1% and 19%, respectively. Within service revenue, postpaid’s expansion (+1%) was more than offset by the declines in prepaid (-2%) and digital (-10%) revenues. However, core net profit grew by 11% thanks to improved efficiency (EBITDA margin +1.1ppt) along with lower D&A (-4%).

YoY. Top line lost 2% as the weakness in service revenue (-2%) wiped out device sales’ improvement (+1%). Postpaid was the only service revenue gainer (+3%) while prepaid and digital revenues decreased by 4% and 25%, respectively. In spite of that, bottom line strengthened 4% to RM282m attributable to effective cost savings (EBITDA margin +2.1ppt) and lower D&A (-4%).

Postpaid revenue at RM633m (+1% QoQ, +3% YoY) driven by quality acquisition, low churn rate and a growing base opting for attractive smart bundles and entry-level plans. Added 42k subs in 1Q22 at the expense of ARPU which was eroded by RM1 to RM61 partially due to higher mix of entry-level plans.

Prepaid sales softened to RM615m (-2% QoQ, -4% YoY) in a highly competitive market where it prioritised on acquiring higher value subs who are attracted to its leading network position. Lost 119k subs due to the shortfall in migrant segment while ARPU also softened by RM1 QoQ to RM32.

Capex. Outlay of RM86m or 6% of total revenue for continuous network enhancements and modernisation of in-house digital capabilities. LTE and LTE-A population coverages improved by 1% sequentially. At the same time, Digi continued to invest in fibre and achieved 10,316km (+1% QoQ, +3% YoY) as end of 1Q22.

FY22 guidance. (1) Service revenue: return to growth underpinned by momentum in postpaid, B2B and fibre; (2) normalized EBITDA to be around FY21 level (RM3bn); and (3) capex/total revenue to be around FY21 level (12.8%).

Forecast. Unchanged. Maintain HOLD with unchanged DCF-derived TP of RM4.00 using WACC of 5.7% and TG of 1%. While waiting for more clarities on merger and 5G structure with DNB, dividend yield of 3.8% should sustain share price in the near term.

Source: Hong Leong Investment Bank Research - 5 May 2022