Results Highlight

o 3Q17 net income declined 12.1% YoY but increased 7.2% QoQ to RM385m. Quarterly revenue rose 1% YoY and 1.2% QoQ to RM1.57bn as decline in prepaid and device revenue was cushioned by gain in postpaid.

o Steady margin - 3Q17 EBITDA margin was steady at 46% compared to 46% in 2Q17 and 48% in 3Q16 due to lower device cost and decrease in domestic and international voice traffic volumes.

o Below forecast – 9M17 revenue of RM4.7b came slightly below forecast after achieving 68% of our full year forecast while nine months’ net profit of RM1.12b was below estimate after making up 64% of FY17 forecast.

o Continuous growth in Postpaid segment – Postpaid segment continued its momentum after revenue for the quarter gained 13.9% YoY and 3.9% QoQ to RM557m. However, prepaid revenue declined 13.7% YoY but increased marginally by 0.2% QoQ to RM919m.

o Lower prepaid subs. – In 3Q17, total subscribers decreased 3.2% YoY and 1.5% QoQ to 11.85m, after prepaid subscribers dropped 7.8% YoY and 2.9% QoQ to 9.46m, while postpaid subscribers increased 20.1% YoY and 4.5% QoQ to 2.4m.

o Resilient ARPU – Amid the competitive environment, DiGi’s blended ARPU for 3Q17 was unchanged at RM41 as prepaid ARPU maintained at RM32 while postpaid ARPU declined to RM77 (vs RM78 in 2Q17).

o Steady operating cash flow – 3Q17 operating cash flow increased to RM575m (vs RM488m in 2Q17) as capex decreased to RM152m (vs RM229m in 2Q17). Cash reserves improved to RM661m (vs RM628m in 2Q17) while net debt/EBITDA was unchanged at 0.7x following the RM900m issue of Islamic debts to pare down its interest bearing debts and spectrum payments.

o Interim dividend – DiGi declared its third interim dividend of 4.9 sen/share, taking total dividend declared so far to 14.2 sen. We expect full year dividend of 20 sen, translating into a yield of 4%.

Earnings Outlook/Revision

o Spectrum boost – Digi has launched its 4G LTE on 900Mhz after the spectrum refarming. We expect Digi’s growth in the postpaid segment to continue as the prized

900Mhz spectrum will enable Digi to improve its indoor network quality and coverage. Prepaid revenue decline is expected to normalize as loss of revenue from legacy prepaid services moderates.

o Lowering earnings forecast – We are reducing our revenue and EPS forecasts for FY17F as postpaid earnings growth has not accelerated as expected.

o Maintain HOLD – Our recommendation is kept at HOLD with a higher target price of RM4.96 (previously RM4.71) based on DDM as we roll over our valuation to FY18F.

Source: JF Apex Securities Research - 19 Oct 2017