Digi reported a lacklustre set of results: 1Q20 net profit fell by 2.8% yoy to RM332m due to higher device costs for postpaid acquisitions and higher traffic charges, partly mitigated by an RM37m gain from an interest rate swap. In tandem, management has declared a lower 1Q20 DPS of 4.2 sen (1Q19: 4.3 sen). Overall, the earnings are within market and our expectations. We maintain our SELL rating with an unchanged DCF-derived price target of RM3.80. At a 27x 2020E PER, Digi is trading at 1 standard deviation above its 9-year average PER, looks stretched to us, considering its weak earnings outlook.

1Q20 net profit fell by 2.8% yoy on high device costs, traffic charges

Despite a higher 1Q20 revenue of RM1.56bn (+3.4% yoy), Digi’s net profit slipped by 2.8% yoy to RM332m due to higher upfront device costs (for postpaid acquisitions) and higher traffic charges, partly mitigated by a RM37m gain from an interest rate swap. The higher 1Q20 revenue was driven by higher device sales; Digi’s service revenue slipped by 0.4% yoy due to lower interconnection rates. The results were within expectations; 1Q20 net profit accounted for 24-25% of the street and our full year forecasts.

1Q20 DPS of 4.2 Sen Is the Lowest Since 1Q13

In tandem with the weaker earnings, management declared a lower 1Q20 DPS of 4.2 sen (1Q19: 4.3 sen). We note that the 4.2 sen DPS was the lowest quarterly payout since 1Q13.

Sequentially, Earnings Slipped on Lower Service Revenue

Sequentially, Digi’s 1Q20 net profit slipped by 3.2% qoq due to lower service revenue (-3.5% qoq), higher staff cost and operation & maintenance costs, partly offset by a RM37m gain from an interest rate swap and lower provision for doubtful debts. The sequential decline in revenue was attributable to a 2.4% decline in the number of subscribers (to 11.0m) and lower roaming revenue.

Management to Revisit Earnings Guidance When There’s Better Clarity

Management to revisit the earnings guidance when there is more clarity on the timing of MCO being lifted, Covid-19 and economic outlook. To recap, Digi’s earlier guidance was a flat to low-single-digit decline in its 2020 service revenue and EBITDA, and capex to be similar to that in 2019 (RM753m).

Source: Affin Hwang Research - 24 Apr 2020