• 3Q20 net profit fell by 10% yoy on lower service revenue and higher costs.
• Sequentially, 3Q20 net profit improved by 11% on rebound in service revenue (+4.3% qoq). Notably, prepaid service revenue has recovered well on higher ARPU. However, the results were below market and our forecasts due to higher-than-expected depreciation and operating costs.
• We trim our 2020-22E EPS forecasts by 3-4% and lower our price target to RM4.15 (from RM4.60) but maintain our HOLD rating. At 25x 2021E PER, valuation is comparable to its 8-year average and looks fair to us.

3Q20 net profit fell by 10% yoy on lower service revenue, higher costs

Digi reported a lacklustre set of results - 3Q20 net profit fell by 9.9% yoy to RM321m due to lower service revenue (-2.8% yoy to RM1.37bn) and increase in depreciation and provision for doubtful debts, partly cushioned by lower finance, marketing and operation & maintenance expenses. Sequentially, Digi’s 3Q20 net profit improved by 11.4% on rebound in service revenue (+4.3% qoq) and the absence of non-recurring expenses (RM16m of Asset Retirement Obligations was recognised in 2Q20). Digi declared 4.1 sen of dividend for 3Q20 (3Q19: 4.5 sen, 2Q20: 3.7 sen).

9M20 Net Profit Fell by 14% Yoy, Below Market and Our Expectations

Cumulatively, Digi’s 9M20 net profit fell by 13.7% yoy to RM941m due to lower service revenue (-3.1% yoy), higher depreciation, traffic charges and increase in provision for doubtful debts (RM64m in 9M20 vs RM45m in 9M19). Overall, the 9M20 earnings were below market and our expectations, accounting for 72% of market and our full year forecasts. The key variances to our forecasts are weaker-than-expected postpaid revenue, as well as high operating costs and depreciation charges.

3Q20 service revenue – prepaid rebounded strongly while postpaid weakened

Digi booked RM748m of prepaid service revenue in 3Q20 (+10.2% qoq / +1.1% yoy), driven by higher ARPU of RM33 (from RM29 in 3Q19 and 2Q20) and sequential recovery in the number of subs (7.66m in 3Q20, +0.9% qoq / -8.1% yoy). The higher prepaid ARPU was attributable to a higher number of Malaysian subs (a lower number of migrant workers), better data monetisation and reduction in non-revenue generating subs. Elsewhere, Digi reported an unexpected reduction in postpaid subs (-0.3% qoq to 3.02m) due to a weak economy, higher competition and management’s decision to focus on quality acquisitions in order to manage credit risk.

Source: Affin Hwang Research - 19 Oct 2020