Results Highlight

• 4Q16 net income increased 7.3% YoY to RM410m due to lower operating cost despite revenue falling 3.2% YoY to RM1.67bn following decline in prepaid revenue.
• Lower QoQ profit – Quarterly net profit dropped 6.4% QoQ due to higher device and traffic cost. This was despite 4Q16 revenue climbing 3.2% QoQ due to higher device sales.
• Within forecast – Twelve months revenue of RM6.6bn came within forecast after achieving 97% of our full year forecast while net profit of RM1.63bn was within estimate after making up 95% of FY16 estimate.
• Flat service revenue – 4Q16 prepaid revenue was steady QoQ at RM1.56bn but declined 2% YoY. Postpaid revenue continued to climb after rising 4.5% QoQ and 13.6% YoY to RM511m, which was just enough to cover the decline in prepaid revenue by 8.2% QoQ and 2% YoY to RM1.04bn.
• Postpaid subscriber growth cancelled out prepaid churn – In 4Q16, total subscribers increased 1.4% YoY and 0.4% QoQ to 12.3m, after prepaid subscribers dropped 0.8% YoY and 0.5% QoQ to 10.2m while postpaid subscribers increased 14.1% YoY and 2.1% QoQ to 2.1m.
• Resilient ARPU – Amid the competitive environment, DiGi’s blended ARPU for 4Q16 was slightly higher at RM42 (vs RM41 in 3Q16) as prepaid ARPU was unchanged at RM34 while postpaid ARPU climbed to RM81 (vs RM80 in 3Q16).
• Steady operating cash flow – 4Q16 operating cash flow declined to RM501m (vs RM573m in 3Q16) as capex climbed to RM240m (vs RM202m in 3Q16). Cash reserves improved to RM377m (vs RM331m in 3Q16) as interest bearing debts surged 56% QoQ to RM2.82bn. As a result, net debt/EBITDA increased to 0.6x from 0.4x in 3Q16.
• Fourth interim dividend – DiGi declared its final interim dividend of 4.8 sen/share, taking total dividend for the year to 20.9 sen/share, which is in line with our expectation.

Earnings Outlook/Revision

• Keeping earnings forecast – We are maintaining our revenue and EPS forecasts for FY17 and FY18 as price competition has normalised. Management guided 2017 revenue and EBITDA margin to be the same around 2016 levels.
• Spectrum boost – We expect Digi’s growth in the postpaid segment to continue as Digi benefited from last year’s spectrum refarming after being allocated the prized 900Mhz which will enable it to improve its network quality and overturn customers’ perception of weak coverage.
• Maintain HOLD – Our recommendation is kept at HOLD with an unchanged target price of RM4.71 based on DDM.

Source: JF Apex Securities Research - 24 Jan 2017