We upgrade Digi to BUY with an unchanged price target of RM5.00, after its share price correction (-6% mom, -12% yoy). Digi reported a modest set of results: 1Q18 net profit grew by 3% yoy to RM386m on accounting changes. Adjusted for the accounting changes, 1Q18 profit was 6% weaker yoy due to higher depreciation and finance costs. Nonetheless, operating cashflow and dividend (4.9 sen vs 4.7 sen) are both higher yoy. All in, the results are within market and our expectations. Current valuations of 23x 2018E PER, 13x 2018E EV/EBITDA are within historical trading range. Upgrade to tactical BUY following its price dip, ahead of likely reinstatement of Shariah compliant status in May18.

Results Are Broadly Within Market and Our Expectations

Digi’s 1Q18 net profit grew by 3.5% yoy to RM386m, driven by adoption of MFRS 15, higher service revenue (+1.6% yoy) and lower opex (-0.8% yoy). Of which, the adoption of MFRS 15 (higher upfront recognition of revenue from contracts with customers) gave the largest lift, it increased 1Q18 profit by RM34m (c.10%). Overall, the results are within expectations - 1Q18 net profit account for 26% of the street and our full year profit forecast.

Adjusted for accountings, earnings was weaker due to D&A, interests

Adjusted for the accounting changes, 1Q18 EBITDA inched up to RM741m (+4% yoy) but net profit fell by 6% due to higher depreciation / amortization costs (increase in spectrum cost amortization) and higher interest expenses.

Operationally, 1Q18 Was a Commendable Quarter, in View Of:

(i) Digi reported a 0.7% yoy increase in service revenue, driven by higher blended ARPU of RM42 (from RM40), which more than offset a minor decline in total subscribers (-19k yoy); (ii) network, sales and marketing costs have declined, aided by improvement in operational efficiencies and lower site rental costs; (iii) operating cashflow strengthened by 9% yoy to RM560m; and (iv) 1Q18 dividend inched up to 4.9 sen, vs 4.7 sen in 1Q17.

Upgrade to BUY on Price Weakness

We maintain our earnings forecasts and DCF-derived target price of RM5.00 but tactically upgraded Digi to BUY (from HOLD) following its recent price dip (-6% mom). Re-rating catalysts are a likely reinstatement of Shariah compliant status in May18 and moderation in domestic telco price competition. Key risks are weaker earnings / higher price competitions.

Source: Affin Hwang Research - 16 Apr 2018