Result

• Digi registered a net profit of RM353m in 4Q19. The reported net profit declined 2.5% QoQ and 6.6% YoY due to non-recurring items such as depreciation cost of RM202m, finance cost of RM32m and IT cost of RM9m.
• Steady revenue. Quarterly revenue was higher at RM1.68b after adding 7.4% QoQ and 0.2% YoY. Revenue growth was supported by higher postpaid revenue of RM680m (+2% QoQ, +9% YoY) and device revenue of RM241m (+62% QoQ and 2% YoY) which offset lower prepaid revenue of RM736m (-1% QoQ and -10% YoY).
• Lower FY19 earnings. For FY19, revenue deteriorated 4% YoY to RM6.3b due to lower prepaid revenue and device revenue. A lower PAT of RM1.4b was recorded (- 6% yoy) as a result of non-recurring items. Underlying PAT stood at RM1.54b which is the same as FY18.  Slightly below expectation. Overall, 2019 net profit accounts for 96% of ours and consensus full year estimates.
• Solid growth from the postpaid segment. Postpaid subscribers strengthened to 3.03m, climbing 1.3% qoq and 8.1% yoy, fuelled by the PhoneFreedom 365 program along with customer migration from prepaid to pospaid, whilst postpaid ARPU was unchanged at RM71.  Continuous decline in prepaid segment. Prepaid subscribers declined to 8.2m (-1.1% qoq and -6.8% YoY), due to churn and migration to postpaid. Prepaid ARPU of climbed to RM30 from RM29 in the previous quarter.
• Lower operating cashflow. Operating cashflow declined to RM512m (-15% QoQ) from RM606m due to higher capex while net debt to EBITDA was slightly higher at 0.9x (vs 0.8x in 3Q19).
• Dividend declared. The Group declared a 4 th interim dividend of 4.4sen/share, taking full year dividend to 18.2 sen, which is slightly below our expectation of 19 sen.
• Outlook for 2020. Management has guided for: a) flat to low single digit decline in service revenue and EBITDA, and b) capex to remain similar to 2019 at RM753m.

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.
• Major risks include higher market competition from other telcos, 5G capex investment and lower-thanexpected profit margin.

Earnings Outlook/ Revision

• We lowered our earnings forecast for FY20F as 2019 earnings fell slightly below our full year earnings expectation.

Valuation/Recommendation

• Maintain HOLD with a lower target price of RM4.75 (previously RM5.06). Our target price is derived based on DCF valuation with a WACC of 6.62% and a long term growth rate of 2%. Our target price also implies a 25.4x FY20F PE based on EPS of 18 sen.

Source: JF Apex Securities Research - 23 Jan 2020