Result

• Digi reported a net profit of RM393m for its 3Q18. The quarterly net profit increased 2.3% QoQ and 2.1% YoY. However, quarterly revenue dropped by -1.1% QoQ, whilst increased 1.9% yoy.
• For 9M18, the Group attained a higher topline and bottomline of +3.3% and +4.1% respectively.
• Meeting expectations. The Group recorded a 9M18 net profit of RM1163m, reaching 73.3%/77.3% of our/ consensus estimates respectively.

Comment

• Higher earnings QoQ thanks to better operating profit margin. The Group posted a better EBIT/EBIT margin of +2.0%/+1.1ppts, mainly due to non-recurring network operating model transition cost of RM40m incurred in 2Q18, which offset lower revenue from the prepaid segment.

• Better earnings YoY, as a result of better topline. The higher revenue achieved supported by increase in the postpaid revenue along with the device revenue, which were able to offset lower postpaid revenue. Meanwhile, a better EBIT margin achieved as a result of efficient cost management and lower capex spent.

• Stronger 9M earnings due to improvement in EBITDA margin. The Group posted a better revenue as a result of continued increase in the postpaid revenue coupled with the device revenue. Also, the Group attained a better EBITDA margin of +1.4ppts, well supported by efficient sales and marketing activities as well as optimized network operations.

• Continuous growth from the Postpaid. Postpaid revenue grew 2.4% QoQ and 8.3% YoY, backed by 2.7m postpaid subscribers. Besides, postpaid subscriber base strengthened to 2.7m, up 2.8% QoQ and 14.0% YoY, fuelled by strong take-up and plan upgrades (to value postpaid plan with device bundles), family and Borderless Roaming Proposition.

• Disappointing results from the prepaid segment. Prepaid revenue continued facing decline of -3.5% QoQ and -9.1% YoY due to progressive transition from voice to data and continued prepaid to postpaid conversions, which reduced the number of prepaid subscribers by -4.1% YoY to 9.1m.

• Steady cashflow. Net cashflow increased slightly by 0.3% QoQ and 4.0% YoY to RM598m, thanks to higher cash flow from operation and relatively low capex spending during this quarter. Beside, cash reserves increased from RM428m in 2Q18 to RM565 in 3Q18, thanks to higher cashflow from operation.

• Dividend declared. The Group has declared a 3nd interim dividend of 5.0sen/share.

• Outlook. Management has guided for: a) flat service revenue growth, b) 46% to 47% of EBITDA margin, and c) capex to service revenue ratio of 11% to 12%. Meanwhile, it is in line with our expectation.

• Moving forward, we foresee that the Group might be able to attain better sales revenue in 4Q18 due to continued prepaid to postpaid conversions, along with the introduction of device bundles with the new iphone plan.

• Major risk includes government’s announcement on the increase of spectrum fees.

Earnings Outlook/ Revision

• We retain our earnings forecast for FY18F and FY19F as we believe that the Group will continue to generate higher earnings banking on its optimised cost agenda.

Valuation/Recommendation

• Downgrade to HOLD from BUY following the surge of share price. Our target price remains unchanged at RM4.71, based on DCF valuation with WACC of 8.08% and a long term growth rate of 2.8%. Our target price also implies a 23.6 FY18F PE based on EPS of 20 sen.

• Overall, we favour Digi in the long term mainly due to its: a) healthy cashflow, b) attractive dividend payout ratio of 100%, and d) higher EV/EBITDA as compared to its peers.

Source: JF Apex Securities Research - 18 Oct 2018