Result

• Digi registered a net profit of RM332m in 1Q20. The reported net profit declined 3% QoQ and 3% YoY mainly due to higher depreciation cost of RM306m vs RM291m in 4Q19.

• Lower revenue. Quarterly revenue was lower at RM1.56b after dropping 7% QoQ but increased 3% YoY. Revenue decline was due to lower revenue from all segments: a) postpaid RM656m (-4% QoQ, +5% YoY), lower prepaid RM731m (-3% QoQ and -5% YoY) and device revenue of RM173m (-28% QoQ and +49% YoY). QoQ revenue was affected by seasonal impact (absence of year-end promotions that were conducted in 4Q19), lower non internet usages and roaming services.

• Within expectation. 1Q20 net profit and revenue are within our expectation after accounting for 26% and 24% of ours full year estimates respectively.

• Postpaid revenue affected. Postpaid subscribers increased to 3.1m, climbing 1% QoQ and 6% YoY. However, postpaid ARPU declined to RM69 from RM71 in 4Q19.

• Continuous decline in prepaid segment. Prepaid subscribers decreased to 7.9m (-4% QoQ and -5% YoY), as subscription acquisition was affected by the COVID-19 breakout. Prepaid ARPU was unchanged at RM30.

• Steady operating cashflow. Operating cashflow was flat at RM617m vs RM612m due to lower capex while net debt to EBITDA was steady at 1.5x (vs 1.4x in 4Q19).

• Dividend declared. The Group declared its 1st interim dividend of 4.2 sen/share. We expect full year dividend of 18 sen, which translates into a yield of 4%.

• 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 to remain resilient with continued discipline in cost efficiency and strong cashflow.

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

Earnings Outlook/ Revision

• We maintain our earnings forecast for FY20F as 1Q20 earnings came within our full year earnings expectation.

Valuation/Recommendation

• Maintain HOLD with an unchanged target price of RM4.75. 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 25.3x FY20F PE based on EPS of 18 sen.

Source: JF Apex Securities Research - 24 Apr 2020