Result

• Digi registered a net profit of RM392m for its 2Q19. The quarterly net profit increased 14.6% qoq and 2.1% yoy. Meanwhile, quarterly revenue stood at RM1546.0m, down 9.9% qoq and 7.7% yoy.
• For 6MFY19, Digi attained a higher topline (+2.5% yoy), and lower bottomline (-4.4% yoy)
• Meeting expectations. Overall, 6M19 net profit accounts for 48.0%/48.6% of our/consensus full year estimates.

Comment

• Better earnings qoq. As compared to 1Q19, Digi revenue increased 2.5% qoq supported by higher postpaid and device revenue which offset lower prepaid revenue. Meantime, higher PBT margin is recorded, +1.7ppts qoq, thanks to lower depreciation expenses and finance costs.

• Stronger qoq earnings. Digi recorded a lower revenue (- 4.4% yoy), dented by lower prepaid and device revenue. Besides, lower PBT is recorded, -5.2% yoy, bogged down by higher depreciation and finance expenses post adoption of MFRS 16. Despite that, net profit increased by 2.1% yoy, after accounting for uplifts from prior years’ deferred tax overprovision of RM16m.

• Lackluster 6M19 earnings. Year to date, the Group revenue deteriorate -6.1% yoy, again, due to lower prepaid revenue and device revenue. As such, a lower PBT is recorded, down 4.7% yoy.

• Steady growth from the postpaid segment, as expected. Postpaid subscribers strengthened to 2.9m, up 2.5% qoq and 10.2% yoy, fuelled by PhoneFreedom 365 progra along with conversion from prepaid to pospaid, whilst postpaid ARPU dropped to RM70, -1.4% qoq and – 2.8% yoy.

• Depressed results from the prepaid segment, as expected. Prepaid subscribers maintained at 8.4m, +0.5% qoq (-6.3% qoq), no thanks conversions from prepaid to postpaid. Flat prepaid ARPU of RM29 was recorded, no change in qoq and -9.4% yoy, due to intense data price competition and abundance data offers.

• Lower operating cashflow. Operating cashflow declined by RM189m, down -21% qoq and -12% yoy, as a result of higher capex led by capacity upgrades and fibre network expansion.

• Dividend declared. The Group declared a 2nd interim dividend of 5.0sen/share, representing 49% of our full year FY19F dividend forecast. We expect a similar dividend payment for the coming quarters, translating into dividend yield of around 3.9%.
• Outlook for FY19F. Management has guided for: a) low single digit decline service revenue, b) low single digit of EBITDA, and c) capex to service revenue ratio of 11% to 12%. Meanwhile, it is inline with our expectation excludes impact of MFRS 16.
• Moving forward, Digi will continue to a) Drive postpaid growth, b) Exploit to SME/B2B opportunities and c) Continue focusing on cost efficient agenda. As such, we do not expect recovery from prepaid segment for the FY19.

• We expect Digi continue attain higher postpaid and device revenue in coming quarter underpinned the Phone Freedom 365 program pursuant to the launch of new phone model (ie. Samsung S10 note).

• Major risks include higher market competition from other telcos and lower-than-expected profit margin.

Earnings Outlook/ Revision

• We maintained our earnings forecast for FY19F and FY20F as 6M19 earnings fall within our full year earnings expectation.

Valuation/Recommendation

• Maintain HOLD with a higher target price of RM5.06 (previous target price: 4.47) as we expected a better performance from postpaid segment on the coming quarters. Out target price is derived based on DCF valuation with a WACC of 7.57% and a long term growth rate of 2.8%. Our target price also implies a 25.3x FY19F PE based on EPS of 20sen.

Source: JF Apex Securities Research - 15 Jul 2019