Digi continued to show operational improvement – 4Q17 service revenue grew by 2.5% qoq and OPEX were well contained. The FY17 net profit (-10% yoy) was nevertheless impacted by lower revenue and higher D&A / interest expenses, but within expectations. Moving into 2018, management expects EBITDA to be flat at c. RM2.9bn, with which we concur. Maintain HOLD with a higher DCF derived TP of RM5.00. It is trading at 14x FY18E EV/EBITDA (within its historical trading range) on a likely 4% dividend yield, which we believe is fair.
Digi reported lower FY17 net profit of RM1,477m (-10% yoy) due to weaker revenue (-RM257m yoy), higher depreciation & amortization expenses (+RM135m yoy on the commencement of spectrum fee amortization) and higher interest costs (+RM54m yoy; gross borrowings have doubled since end-FY15), partly offset by lower tax expenses (-RM97m yoy; effective tax rate normalized to 25.6%).
Digi’s 4Q17 net profit fell by 6% qoq (-RM25m) to RM360m on higher interest expenses (+RM26m qoq) arising from the RM12m fair value loss on interest rate swaps, a reversal from the RM14m gain in 3Q17. Operationally, though, 4Q17 was a solid quarter – service revenue grew by 2.5% qoq on a higher blended ARPU of RM43 (from RM41), driven by a 4% increase in post-paid subs and higher active internet subscribers.
Digi has achieved 19% yoy savings in traffic costs (FY17: RM1,024m) on the reduction in volumes and costs from legacy prepaid services. Elsewhere, the ongoing digitalization initiatives have partly contributed to a 3.5% yoy decline in staff costs; sales and marketing costs have also come off by 2.3% yoy. However, O&M costs have inched up due to its network expansion.
Overall, the results were in line with both the consensus and our expectations. Key parameters (service revenue growth, EBITDA margin, capex) were within management guidance. Digi has announced a fourth interim dividend of 4.6 sen (4Q16: 4.8 sen), bringing the full-year DPS to 18.8 sen (FY16: 20.9 sen). This note marks a transfer of coverage.
Source: Affin Hwang Research - 24 Jan 2018
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