Digi reported a decent set of results: 6M18 service revenue grew by 1.4% yoy on higher postpaid revenue while net profit was 5% higher due to accounting changes. Also, management has upgraded its 2018 earnings guidance (marginally) and declared a higher dividend of 4.9 sen for 2Q18 (2Q17: 4.6 sen). Overall, the results are within market and our expectations. Maintain HOLD. Digi now trades at 21.6x 2019E PER, 8% below historical average of 23.5x, looks fair, considering the competitive operating environment and fluid policy outlook.

A Decent Set of Results, Within Expectations

Digi’s 6M18 net profit grew by 5.3% yoy to RM771m, driven by adoption of MFRS 15, higher service revenue (+1.4% yoy) and lower network and marketing costs. The adoption of MFRS 15 (higher upfront recognition of revenue from contracts with customers) gave the largest lift, it increased 6M18 profit by RM60m (c.8%). Under the old accounting practise, Digi’s 6M18 net profit of RM711m would be 3% lower yoy; the decline was due to recognition of an one-off network operating model transition cost amounting to RM40m. Overall, the results are within the street and our expectations – 6M18 net profit accounts for 52% of street and our full year profit forecast. Digi declared a higher 2nd interim dividend of 4.9 sen (2Q17: 4.6 sen).

Sequentially, Earnings Was Broadly Unchanged

Sequentially, Digi’s 2Q18 (post adoption of MFRS 15) was 0.4% lower qoq at RM384m. Service revenue fell by 0.5% qoq due to lower prepaid revenue (-2.9%), cushioned by higher postpaid revenue (+3.5%). The RM40m oneoff network transition cost eroded 2Q18 profitability, although partially mitigated by lower depreciation and amortisation charges.

Management Upgraded 2018 Guidance (marginally)

Management now expects Digi to achieve flat service revenue growth (from flat to low single digit decline) and EBITDA margin of 46-47% (from 46%).

Maintain HOLD With An Unchanged Target Price of RM4.20

We maintain our earnings forecasts, HOLD rating and DCF-derived 12- month target price of RM4.20. Digi now trades at 21.6x 2019E PER, 8% below historical average of 23.5x, looks fair, considering the competitive market environment (aggressive promotions from U Mobile) and fluid government policy outlook (reintroduction of sales and service tax in Sep18). Upside risk: stronger earnings; downside risk: higher competitions.

Source: Affin Hwang Research - 16 Jul 2018