Digi reported a solid set of results: 12M18 net profit grew by 4.3% to RM1.46bn on the back of a higher EBITDA margin, attributable to good cost management and a positive lift from accounting changes. In tandem, 12M18 dividend grew by 4% yoy to 19.6 sen, translating to a yield of 4.3%. Overall, the results were within market and our expectations. We raised our 2019-20 EPS forecasts by 1-2% after incorporating Digi’s 2018 financial statement and management’s 2019 guidance. We maintain our HOLD rating with a higher DCF-derived TP of RM4.45 (from RM4.38). 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.

12M18 Net Profit at RM1.54bn, Within Expectations

Digi’s 12M18 net profit grew by 4.3% yoy to RM1.54bn, driven by the adoption of MFRS 15, higher service revenue (+0.2% yoy) and lower network, marketing and operating/maintenance costs. The adoption of MFRS 15 gave the largest lift, increasing the net profit by RM77m (c.5%). Elsewhere, Digi’s ongoing cost management initiatives via digitisation have contributed to lower marketing and O&M costs. All in, the results are within market and our expectations. Management has declared a 4.8 sen dividend for 4Q18, bringing the 2018 full-year payout to 19.6 sen (+4.3% yoy).

Sequentially, Net Profit Slipped by 3.8% on Higher Staff Cost

Digi’s 4Q18 net profit (post adoption of MFRS 15) fell by 3.8% to RM378m due to the high staff cost and higher provision of doubtful debts, but we are not alarmed by these seasonal fluctuations in the component costs. Elsewhere, Digi’s 4Q18 service revenue was flat at RM1.44bn - higher revenue from the postpaid segment (RM622m, +3.2% qoq) was offset by a decline in its prepaid revenue (RM815m, -2.4% qoq). Digi reported a higher number of postpaid subscribers of 2,805k in 4Q18 (+2.7% qoq) while the number of its prepaid subscribers fell to 8,855k (-2.4% qoq).

Management Expects Low Single Digit EBITDA Growth in 2019

Moving into 2019, management expects Digi to report a flat service revenue or RM5.9bn but higher EBITDA (low single digit growth), driven by better cost management and operational efficiency across its business operations via ongoing digitisation initiatives. Digi maintained its capex to service revenue ratio of 11-12% (similar to 2018 level).

Source: Affin Hwang Research - 25 Jan 2019