• Digi’s 4Q20 net profit fell by 13% qoq to RM280m on lower service revenue (-1.7%) and higher depreciation / impairment costs. Digi’s 2020 net profit of RM1.22bn was 5% below consensus and 3% below our forecasts
• Moving into 2021, management is guiding for a low-single-digit decline in revenue, mid-single-digit decline in EBITDA and higher capex-to-revenue ratio of 14-15% (from 11.7% in 2020A)
• We cut our 2021-22E EPS by 5-9% and lower our price target to RM3.85. Despite the earnings weakness in 2021E, we believe that Digi’s long-term business prospects are largely intact. Maintain HOLD

4Q20 Net Profit Fell by 13% Qoq to RM280m

Digi reported a weak set of results - 4Q20 net profit fell by 12.7% qoq to RM280m due to lower service revenue (-1.7% qoq), recognition of RM50.7m write-off on network assets following a reconciliation of fixed asset register, and increase in finance costs (partly attributable to RM4.1m fair value loss on interest swap, compared to a gain of RM3.4m in 3Q20). Tracking the weaker earnings, Digi declared a lower dividend of 3.6 sen (3Q20: 4.1 sen, 4Q19: 4.4 sen).

2020 Net Profit Fell by 15% Yoy, Below Market and Our Expectations

Cumulatively, Digi’s 2020 net profit fell by 14.8% yoy to RM1.22bn due to lower service revenue (-3.8% yoy), higher depreciation / impairment charges, increase in staff, operation & maintenance costs, partly offset by lower marketing expenses. While Digi’s 2020 EBITDA was within our expectations, the group’s net profit was 3% below our forecasts due to higher-than-expected depreciation, amortisation & impairment charges. The results were also below market expectations – Digi’s 2020 net profit accounted for 95% of consensus full year earnings forecasts.

4Q20 Revenue Was Affected by Lower Consumer Spend, Weaker Economy

Digi saw a 3.4% sequential decline in the number of prepaid subs during 4Q20, partly attributable to softer demand from the foreign worker segment. While the group delivered 22k increase (qoq) in the number of postpaid subs to 3.04m, it was insufficient to make up for the shortfall in prepaid subs (-261k to 7.40m). Digi reported a RM1 decline in both its prepaid and postpaid ARPUs to RM32 and RM66 respectively. All in, the lower 4Q20 service revenue (-1.7% qoq) was attributable to reduced non-internet and voice usages due to lower consumer spend, weaker economic activities as well as lower inflow of foreign workers.

Source: Affin Hwang Research - 29 Jan 2021