Digi reported a modest set of results: 2Q19 earnings recovered by 15% qoq on higher revenue, one-off cost savings and lower tax rate. Cumulatively, 6M19 net profit fell by 4.7% yoy to RM734m due to the adoption of MFRS16 (leases) and lower service revenue, partly cushioned by lower opex. In view of the weaker 6M19 service revenue, management has lowered its 2019 profit guidance. Nonetheless, the results were within the market and our expectations. We maintain our earnings forecasts, HOLD ratings and DCF-derived TP of RM5.00. At 27x 2019E PER, Digi’s now trades at 1SD above its 8-years average, looks fair, taking into consideration the promising business synergies from the potential merger with Celcom.

2Q19 Net Profit Rebounded by 15% Qoq to RM393m

Digi’s 2Q19 net profit grew by 15% qoq to RM392.5m on higher revenue (+2.7% qoq), lower opex (including non-recurring cost benefits of RM62m), and lower effective tax rate of 19.9% (vs 24.5% in 1Q19). The group’s 2Q19 service revenue grew by 0.7% qoq to RM1.45bn on higher contribution from the postpaid segment, driven by a 2.5% increase in the number of postpaid subscribers (2Q19: 2.93m postpaid subscribers). The number of prepaid subscribers increased to 8.44m (from 8.40m in 1Q19) on stabilised operations and improved acquisition momentum post channel transformation in Mar 2019. To recap, Digi’s prepaid subscribers fell by a steep 5.2% qoq in 1Q19. In 1Q19, Digi was focused on internet subscribers and revamped its sales channel models to attract higher-value subscribers with longer validity, leading to a natural migration to postpaid,

6M19 Net Profit Slipped by 4.7% Yoy Due to Accounting Changes

Cumulatively, Digi’s 6M19 net profit fell by 4.7% yoy due to the adoption of MFRS16 (leases) and lower service revenue, partly cushioned by lower opex. The adoption of MFRS16 has lowered Digi’s 6M19 net profit by 5.9% (Fig 2). Elsewhere, Digi’s 6M19 revenue declined by 6% yoy due to lower interconnect revenue and lower total number of subscribers (-3.4% yoy). The decline in service revenue was cushioned by lower opex, attributable to lower traffic cost and the recognition of several non-recurring cost benefits amounting to RM84m.

The Results Are Within Market and Our Expectations

Overall, the results are within the street and our expectations. Digi’s reported 6M19 net profit account for 49-50% of street and our full year earnings forecasts.

Source: Affin Hwang Research - 15 Jul 2019