Digi reported a decent set of results: 9M18 service revenue grew by 0.9% yoy on higher postpaid revenue while net profit was 4% higher due to a higher EBITDA margin post accounting changes. The results are above market and our expectations due to lower operating costs. We raise our 2018-20 EPS forecasts by 3-4% and revise our DCFderived TP to RM4.38. Maintain HOLD. Digi now trades at a 22.2x 2019E PER, 6% below its 5-year average of 23.5x; this looks fair, considering the competitive operating environment and unexciting earnings outlook.

9M18 Net Profit at RM1.16bn, Above Expectations

Digi’s 9M18 net profit grew by 4.2% yoy to RM1.16bn, driven by the adoption of MFRS 15, higher service revenue (+1.4% yoy) and lower network, marketing and operating/maintenance costs. The adoption of MFRS 15 (higher upfront recognition of revenue from contracts with customers) gave the largest lift, increasing the 9M18 profit by RM84m (c.8%). Under the old accounting policy, Digi’s 9M18 net profit would have been RM711m, 3% lower yoy due to the recognition of a one-off network operation model transition cost of RM40m. Overall, the results are above market and our expectations – 9M18 net profit accounts for 77-78% of the street’s and our full-year profit forecasts. The earnings surprise was largely due to lower marketing, operation & maintenance costs, aided by Digi’s digitization efforts.

Sequentially, Revenue Slipped by 1.1% Due to Lower Postpaid Sales

Digi’s 3Q18 revenue (post adoption of MFRS 15) was 1.1% lower qoq due to lower contribution from the prepaid segment, as the minor increase in prepaid subscriber growth (+0.7% qoq) was insufficient to offset a lower ARPU of RM31/month (from RM32). 3Q18 net profit, however, grew by 2.5% qoq due to a lower operating cost (Digi booked a one-off RM40m network operating model transition cost in 2Q18).

Management Maintains Revenue / EBITDA KPI, Higher Dividend

Management has declared a higher dividend per share of 5.0 sen for 3Q18 (3Q17: 4.9 sen), bringing the 9M18 dividend to 14.8 sen (9M17: 14.2 sen). Separately, management maintained its 2018 service revenue growth guidance (flat) and EBITDA margin guidance of 46-47%.

Source: Affin Hwang Research - 18 Oct 2018