Result

• Digi registered a net profit of RM362m in 3Q19. The reported net profit declined 12.6% QoQ and 7.9% YoY due to RM202m depreciation cost, RM26m finance cost and higher tax rate. The 3Q19 normalised net profit grew 2.2% QoQ and declined 5.8% YoY.

• Steady revenue. Quarterly revenue was flat at RM1.56b after adding 1% QoQ and shedding 2% YoY. Revenue growth was supported by higher postpaid revenue of RM666m (+3% QoQ, +10% YoY) and flat device revenue of RM149m which offset lower prepaid revenue of RM740m (-1% QoQ and -11% YoY).

• Margins declined. 3Q19 EBITDA margin was lower at 46% vs 49% in 2Q19 due to non-recurring cost effects and amortisation. Similarly, PAT margin dropped to 23% from 27% in 2Q19 due the mentioned exceptional items. Excluding the exceptionals, Digi would have posted satisfactory QoQ earnings.

• Lower 9M19 earnings. Year to date, the Group revenue deteriorate 4.8% YoY to RM4.6b due to lower prepaid revenue and device revenue. As such, a lower PAT of RM1.1b was recorded (-5.8% yoy).

• Meeting expectations. Overall, 9M19 net profit accounts for 72%/xx% of our/consensus full year estimates.

• Solid growth from the postpaid segment. Postpaid subscribers strengthened to 3.0m, climbing 2.3% qoq and 9.6% yoy, fuelled by the PhoneFreedom 365 program along with customer migration from prepaid to pospaid, whilst postpaid ARPU inched up to RM71 from RM70 in the previous quarter.

• Continuous decline in prepaid segment. Prepaid subscribers declined to 8.3m (-1.2% qoq and -8.1% YoY), due to churn and migration to postpaid. Flat prepaid ARPU of RM29 was recorded due to intense data price competition and abundance of data offers in the market.

• Higher operating cashflow. Operating cashflow increased by RM115m or +23% qoq to RM606m as a result of lower capex. Net debt to EBITDA stands at 0.8 times.

• Dividend declared. The Group declared a 3nd interim dividend of 4.5sen/share, representing 73% of our full year FY19F dividend forecast of 19 sen. We expect a similar dividend payment for the coming quarters, translating into dividend yield of around 4.2%.

• Outlook for FY19F. Management has guided for: a) low single digit decline in service revenue, b) low-medium single digit decline in EBITDA, and c) capex to service revenue ratio of 12% to 13%.

• Moving forward, Digi will continue to a) Drive Internet revenue, b) Exploit to SME/B2B opportunities and c) Continue focusing on cost efficiency. As such, we do not expect recovery from prepaid segment.

Comment

• We expect Digi will continue to attain higher revenue from Internet (postpaid and prepaid) and device sales in coming quarters underpinned by the Phone Freedom 365 program pursuant to the launch of a new phone model (i.e. 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 9M19 earnings fall within our full year earnings expectation.

Valuation/Recommendation

• Maintain HOLD with an unchanged target price of RM5.06 as we expect a better performance from postpaid segment in the coming quarters. Our 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 - 21 Oct 2019