Digi’s 9M22 core net profit of RM826m (-3% YoY) was in line. Declared third DPS of 3.4 sen based on ~100% payout. YTD performance was impacted by subdued top line despite improvement in EBITDA margin along with lower D&A. FY22 guidance was reiterated with service revenue to return to growth while EBITDA to decline at low single digit. Maintain HOLD with unchanged DCF-derived TP of RM3.60. While waiting for more clarities on merger and 5G structure with DNB, dividend yield of 4.1% should sustain share price in the near term.

Within expectations. 3Q22 core net profit of RM276m (+3% QoQ, -6% YoY) brought 9M22’s to RM826m (-3% YoY) accounted for 71% and 81% of HLIB and consensus full year forecast, respectively. We deem this to be in line as the Prosperity Tax is considered as one off. 9M21 one off items include (i) accrual clean up net of tax amounted to RM5m; (ii) merger-related cost and tax penalty refund totalled RM22m; and (iii) Prosperity Tax which is estimated to be RM123m.

Dividend. Declared third interim tax-exempt (single-tier) dividend of 3.4 (2Q21: 4.0) sen per share, representing ~100% payout ratio. This will go ex on 21 Nov. YTD DPS amounted to 9.1 sen vs 9M21’s 11.0 sen.

QoQ. Revenue was down by 1% as both service revenue and device sales eased 1%. Within service revenue, the weaknesses in digital (-6%) and prepaid (-2%) were more than sufficient to wipe out the expansions in fibre (+29%) and postpaid (+2%). However, core net profit gained 3% attributable to lower cost structure and net finance costs.

YoY. Top line lost 3% due to weaknesses in both service (-2%) and device (123%) revenues. Postpaid (+1%), fibre (+350%) and digital (+6%) were the service revenue gainers while prepaid revenue decreased by 7%. Despite lower D&A (-5%), bottom line lost 6% due to higher opex and net finance costs.

YTD. Turnover declined 3% dragged by device sales (-12%), prepaid (-5%) and digital (-8%), more than offset the strengths in postpaid (+1%) and fibre (+425%). Yet, core earnings softened by 3% although EBITDA margin has improved along with lower D&A.

Postpaid 3Q22 revenue at RM639m (+2 QoQ, +1% YoY) was driven by consistent base management activities and strong demand for high-speed products. Added 39k subs QoQ while ARPU was boosted by RM1 to RM61 thanks to higher smartphone bundles and value Postpaid plans take-ups.

Prepaid 2Q22 sales at RM602m (-2 QoQ, -7% YoY). Added 167k subs QoQ on the back of strong recovery of migrant segment which accounted for circa a quarter of prepaid base. ARPU declined by RM2 QoQ to RM31, impacted by end of Jaringan Prihatin programme in Sep 2022.

Capex. Outlay of RM173m or 11% of sales in 3Q22. LTE and LTE-A population coverages improved marginally at 95% and 80%, respectively. Digi continued to invest in fibre and achieved 10,372km as end of 3Q22.

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

Forecast. Unchanged. Maintain HOLD with unchanged DCF-derived TP of RM3.60 using WACC of 6.3% and TG of 1%. While waiting for more clarities on merger and 5G structure with DNB, dividend yield of 4.1% should sustain share price in the near term.

Source: Hong Leong Investment Bank Research - 21 Oct 2022