Result

• Digi reported a net profit of RM378m for its 4Q18. The quarterly net profit decreased 3.8% QoQ, whilst increasing 5.0% YoY. Meanwhile, quarterly revenue up by 4.6% QoQ and 1.8% yoy.

• For 12M18, the Group attained a higher topline and bottomline of +2.9% and +4.3% respectively.

• Meeting expectations. The Group recorded a full year FY18 net profit of RM1541m, reaching 97.1%/101.5% of our/consensus estimates respectively.

Comment

• Lower earnings QoQ no thanks to lower EBITDA. The weaker EBITDA/EBITDA margin of -1.3%/-2.7ppts, mainly due to higher cost of goods sold (COGS), which offset higher revenue from the surge in demand for contracted device bundled and new PF365 program.

• Better earnings YoY, as a result of better topline and bottomline. The higher revenue achieved supported by increase in postpaid and device revenue, which were able to offset lower prepaid revenue. Meanwhile, the group achieved a better EBIT margin as a result of operating efficiencies for sales and marketing, and network operating activities.

• Stronger 12M earnings due to higher revenue along with better 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/EBITDA margin of +5.3%/+1.4ppts, well supported by efficient sales and marketing activities, lower staff cost as well as lower operation and maintenance costs.

• Steady growth from the Postpaid segment. Postpaid subscribers strengthened to 2.8m, up 2.7% QoQ and 13.1% YoY, fuelled by strong take-up from prepaid to postpaid conversions. Postpaid ARPU moderated marginally to RM77 (+1.3% QoQ, -1.3 YoY), due to plan upgrades.

• Prepaid segment continued to deliver disappointing results. Prepaid subscribers decreased 2.4% QoQ and 4.4% YoY, no thanks to conversion from prepaid to postpaid. The group recorded lower prepaid ARPU of RM30 (-3.2% QoQ, - 11.8% YoY), due to intense data price competition and abundant data offers.

• Cashflow decreasing but still steady. Net cashflow declined by 7.8% QoQ and 13.5% YoY to RM517m, due to higher capex. Besides, cash reserves decreased from RM565m to RM433m, no thanks to higher capex.

• Dividend declared. The Group declared a 4nd interim dividend of 4.8 sen/share. Total dividend for FY18 amounted to 19.6sen/share, which is in line with our dividend forecast of 20 sen/share.

• Outlook. Management has guided for: a) flat service revenue, b) low single digit growth of EBITDA, and c) capex to service revenue ratio of 11% to 12%. Overall, it is in line with our expectation. Moving forward, we foresee the Group to achieve better margin due to its continuing focus and execution of operational efficiency initiatives.

• Major risks include higher market competition from Unifi Mobile and potential government’s announcement on the increase of 700MHz spectrum fees.

Earnings Outlook/ Revision

• We retain our earnings forecast for FY19F at RM1607.3m whilst introducing our FY20F earnings of RM1634.5m. Our net profits estimates for FY19 and FY20 represent growths of 3.7% and 1.7% respectively as we account for better margin as a result of effective cost management.

Valuation/Recommendation

• Maintain HOLD with a target price of RM4.71, based on DCF valuation with a WACC of 8.08% and a long term growth rate of 2.8%. Our target price also implies 22.4x FY19F PE based on EPS of 21 sen.

• We are NEUTRAL on Digi as we do not foresee any rerating catalyst to drive the share price in the near term. However, 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 - 25 Jan 2019