Digi reported an uninspiring set of results: notwithstanding a 1.7% growth in service revenue, its 4Q19 net profit slipped by 3.7% due to higher upfront device costs for postpaid acquisitions. Cumulatively, 2019 net profit fell by 7% yoy to RM1,433m due to the adoption of MFRS16 (-4.2% impact on profit) and lower underlying profit (-3.0% yoy). Overall, the earnings are within our forecast but 3% below market expectation. Looking ahead, management expects a flat to low-singledigit decline in 2020 service revenue and EBITDA. We cut our 2020-21 earnings forecasts by 6%, introduce the 2022 forecasts, and lower our DCF-derived 12-month TP to RM4.25 (from RM4.55). At a 26x 2020E PER, Digi is trading at its 8-year average PER, which looks fair. We maintain our HOLD rating.

4Q19 net profit slipped by 4% qoq on high device costs, traffic charges

In spite of a higher 4Q19 revenue of RM1.68bn (+7.4% qoq) driven by higher device sales and 1.7% service revenue growth, Digi’s 4Q19 net profit slipped by 3.7% qoq to RM343m due to higher upfront devices costs (for postpaid acquisitions) and higher traffic charges. In tandem with the weaker earnings, management declared a lower 4Q19 DPS of 4.4 sen (3Q19: 4.5 sen).

2019 net profit fell by 7% yoy, below street expectation but within ours

Cumulatively, Digi’s 2019 net profit fell by 7.0% yoy due to the adoption of MFRS16 (leases) and lower underlying profit. The adoption of MFRS16 lowered Digi’s 2019 net profit by 4.2% (Fig 3) while its underlying profit slipped by 3% yoy (Fig 1) due to lower service revenue (-2.5% yoy) following a cut in mobile termination rates (MTR), partly cushioned by lower operating costs. Tracking the lower EPS, Digi’s 2019 full-year dividend fell by 7% yoy to 18.2 sen. Overall, the earnings were within our expectation but 3% below the consensus forecast.

Management expects flat to low-single-digit decline in 2020 service revenue and EBITDA; 2020 capex to be similar to that in 2019

Management expects a flat to low-single-digit decline in its 2020 service revenue and EBITDA. Another cut in the MTR (from 1.96 sen in 2019 to 0.99 sen) may supress its 2020 service revenue. The lower service revenue, coupled with higher device / network costs and lower non-recurring savings (RM125m non-recurring savings in 2019 from operating model shifts / contract renegotiations) may lead to a lower 2020 EBITDA. Elsewhere, management expects its 2020 capex to be similar to that in 2019 (RM753m).

Source: Affin Hwang Research - 23 Jan 2020