Digi reported a weak set of 1Q19 results: net profit fell by 12% yoy to RM342m due to lower revenue and the adoption of MFRS16 (lease), partly cushioned by lower opex. Digi declared a reduced interim dividend of 4.3 sen (-12% yoy). Excluding the MFRS16 adjustment, Digi’s 1Q19 net profit of RM366m was still short of market and our expectations, accounting for 23% of consensus and our full-year earnings forecasts. We cut our 2019-21 EPS forecasts by 8% after incorporating MFRS16 and lower revenue forecasts. Maintain HOLD with a lower DCF-derived TP of RM4.35 (from RM4.45).

1Q19 Net Profit Fell on Lower Revenue and Adoption of MFRS16

1Q19 net profit fell 11.6% yoy to RM341.5m on the adoption of MFRS16 (lease) and lower service revenue (-4.7% yoy), but partly mitigated by a 8.6% reduction in operating costs (lower traffic charges, lower sales & marketing costs and a one-off RM22m reduction in O&M costs).

Service Revenue Fell on Lower Interconnect Rate, ARPU and Subs

The unexpected decline in service revenue was attributable to: (i) lower interconnect revenue (-RM15m yoy), (ii) a lower total number of subscribers of 11.25m (-506k yoy); and (iii) a lower blended ARPU of RM39/month (-RM2 yoy). In the prepaid market, Digi is focusing on the internet subscribers and the group has revamped its sales channel models to attract higher-value subscribers with longer validity. This, and the natural migration to postpaid, caused a decline in the number of prepaid subscribers (-790k yoy to 8.4m) and adversely impacted revenue. In the postpaid market, Digi had in Jan-Feb slowed its easy device ownership programme (Phone Freedom 365) to manage credit risks, resulting in a drop in 1Q19 device sales and slower postpaid subscriber growth. The group relaunched the programme in March 2019. Management acknowledged that the market is always competitive but did not list competition as a factor for the decline in service revenue.

Results Below Expectations, Dividend Comes in Lower at 4.3 Sen

The adoption of MFRS16 (lease) has weakened Digi’s 1Q19 net profit by 6.7% (Fig 1). Excluding the MFRS16 adjustment, its 1Q19 net profit of RM366m was still short of market and our expectations due to lower-thanexpected revenue. The group’s 1Q19 net profit (pre-MFRS16) accounts for 23% of the consensus and our full-year forecasts. Tracking the lower 1Q19 reported EPS, management has declared a lower interim dividend of 4.3 sen (from 4.9 sen in 1Q18).

Sequentially, 1Q19 Net Profit (pre-MFRS16) Was 3% Weaker

Sequentially, Digi’s 1Q19 revenue fell by 9.9% due to lower service revenue (-3.1% qoq to RM1,393m) and a sharp decline in device sales and other revenue (-51% qoq to RM116m). Notwithstanding the sharply lower revenue, the sequential declines in 1Q19 pre-MFRS16 EBITDA and net profit were manageable at 2-3% qoq due to lower opex (lower device costs and normalisation in staff costs).

Cutting 2019-21E EPS by 8%, Maintain HOLD

We cut our 2019-21 EPS forecasts by 8% after incorporating the MFRS16 accounting and lower service revenue forecasts. Most of our earnings cuts are attributable to the accounting change (-6%) while the balance was due to lower revenue (-2%). In tandem, we lower our DCF-derived 12-month price target to RM4.35, from RM4.45, but maintain our HOLD rating. Digi now trades at a 24x 2019E PER, comparable to its 5-year average of 23.5x, which looks fair. Upside risk: stronger earnings; downside risk: higher competition.

Source: Affin Hwang Research - 23 Apr 2019