3Q19 Net Profit Slipped by 9% Qoq to RM356m

Notwithstanding a higher revenue of RM1.56bn (+0.9% qoq), Digi’s 3Q19 net profit slipped by 9.3% qoq to RM356m due to lower non-recurring cost savings (RM17m in 3Q19, versus RM62m in 2Q19) and a higher effective tax rate of 27.1% (vs 19.9% in 2Q19).

Higher 3Q19 Service Revenue (+0.8% Qoq)

Digi has reported higher 3Q19 service revenue of RM1,413m (+0.8% qoq) on higher contributions from the postpaid segment, driven by a higher ARPU of RM71/month (from RM70) and 67k growth in number of subscribers to 2,993k. Meanwhile, the prepaid segment continued to see a decline in the number of subscribers (-101k qoq to 8,337k), with a flat ARPU of RM29/month.

9M19 Net Profit Slipped by 6.3% Yoy, Within Our Expectations

Cumulatively, Digi’s 9M19 net profit fell by 6.3% yoy due to the adoption of MFRS16 (leases) and lower service revenue, partly cushioned by a lower effective tax rate. The adoption of MFRS16 lowered Digi’s 9M19 net profit by 4.6% (Fig 2). Digi has declared a quarterly dividend of 4.5sen, bringing its 9M19 payout to 13.8sen (vs 14.8sen in 9M18). Overall, the results were below the market’s but within our expectations; 9M19 net profit accounted for 73% of the street’s and 75% of our full-year profit forecasts.

Management Has Lowered 2019 EBITDA, Increased Capex Guidance

Management maintained its 2019 service revenue guidance as “low singledigit decline” but lowered its EBITDA to “low - medium single-digit decline”, from “low single-digit decline” (note: the guidance excludes the impact of MFRS16: leases). The capex-to-service revenue ratio was increased to 12%-13%, from 11%-12% due to a lower service revenue base, as well as plans to further improve its network quality.

Maintain HOLD With An Unchanged TP of RM4.55

We maintain our earnings forecasts, HOLD rating and DCF-derived 12- month price target of RM4.55. At 25x 2020E PER, Digi shares are now trading at its 8-year historical average PER, which looks fair. Key upside risk is stronger earnings delivery; downside risks are stronger competition and higher-than-expected prices for the upcoming spectrum awards in 2020.

Source: Affin Hwang Research - 21 Oct 2019