Digi’s 1H22 core net profit of RM550m (-1% YoY) was in line. Declared second DPS of 2.8 sen based on 99% payout. While 2Q22 saw improvement in operational performance, bottom line was impacted by higher net finance costs from non cash hedge accounting. FY22 service revenue guided to return to growth while lowered EBITDA guidance implies cost pressure. Maintain HOLD with lower DCF derived TP of RM3.60. 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. 2Q22 core net profit of RM268m (-5% QoQ, -7% YoY) brought 1H22’s to RM550m (-1% YoY) which matched HLIB’s and consensus full year forecast at 47% and 49%, respectively. 1H21 one off items include (i) accrual clean up net of tax amounted to RM5m; and (ii) prosperity tax which is estimated to be RM89m.

Dividend. Declared second interim tax-exempt (single-tier) dividend of 2.8 (2Q21: 3.6) sen per share, representing 99% payout ratio. This will go ex on 30 Aug. YTD DPS amounted to 5.7 sen vs 1H21’s 7 sen.

QoQ. Revenue was up 1% to RM1,539m mainly driven by service revenue (+1%) while device sales was flat. Within service revenue, fibre and digital expanded by 40% and 22% respectively while postpaid and prepaid were rather flat. However, core net profit fell by 5% attributable to higher cost structure and net finance costs from non-cash hedge accounting.

YoY. Top line lost 5% due to weaknesses in both service (-1%) and device (-23%) revenues. Postpaid (+1%) and fibre (+600%) were the service revenue gainers while prepaid and digital revenues decreased by 4% and 1%, respectively. In turn, bottom line loss 7% attributable to increased net finance costs due to non-cash hedge accounting.

YTD. Turnover declined 3% dragged by device sales (-13%), prepaid (-4%) and digital (-14%), more than offset the strengths in postpaid (+2%) and fibre (+500%). As a result, core earnings softened by 1% to RM550m for the same reason mentioned above.

Postpaid 2Q22 revenue at RM629m (flat QoQ, +1% YoY) driven by higher demand for high speed subscriptions and attractive bundling offers. Added 41k subs QoQ while ARPU was eroded by RM1 to RM60 due to higher entry-level plan take-ups.

Prepaid 2Q22 sales at RM616m (flat QoQ, -4% YoY). Added 226k subs QoQ on the back of positive trend in Malaysian base and stable migrant segment. ARPU gained by RM1 QoQ to RM33.

Capex. Outlay of RM175m or 11% of total revenue in 2Q22. LTE and LTE-A population coverages improved marginally at 95% and 78%, respectively. Digi continued to invest in fibre and achieved 10,346km as end of 2Q22.

FY22 guidance. (1) Service revenue: return to growth; (2) normalized EBITDA to decline at low single digit (previously flat YoY); and (3) capex/total revenue to be around FY21 level (12.8%).

Forecast. Unchanged.

Maintain HOLD with lower DCF-derived TP of RM3.60 after adjusting WACC from 5.7% to 6.3% (as we tweak risk-free rate and beta) and TG of 1%. While waiting for more clarities on merger and 5G structure with DNB, dividend yield of 4.2% should sustain share price in the near term.

Source: Hong Leong Investment Bank Research - 18 Jul 2022