Result

• Digi registered a net profit of RM321m in 3Q20. The reported net profit declined 10% YoY mainly due to higher COGS of RM407m (+28% YoY and +18% QoQ) due to higher device and digital costs to fuel rising demands for technology and digital adoption.
• Higher revenue. Quarterly revenue climbed 1% YoY to RM1.58b following higher Device revenue of RM205m (+38% YoY and +52% QoQ). Revenue has now recovered to pre-Covid levels.
• Strong QoQ rebound. Net profit climbed 12% QoQ thanks to lower finance cost and higher revenue (+9% QoQ) following higher Prepaid revenue (+10% QoQ) and Device revenue (+52% QoQ).
• Lower EBITDA margin - Digi posted a lower EBITDA margin of 50% vs 53% in 2Q20 as COGS rose 28% QoQ to RM407m while Opex grew 8% QoQ to RM397m due to higher marketing costs.
• Within expectation. 3Q20 net profit and revenue are within our expectation after accounting for 68% and 76% of ours full year estimates respectively.
• Postpaid segment. Postpaid subscribers was flat at 3.0m (-0.3% QoQ but +1% YoY) while Postpaid ARPU was slightly lower at RM67 from RM68 in 2Q20 due to lower roaming and interconnect revenue.
• Prepaid segment. Prepaid subscribers increased to 7.9m (+1% QoQ and -8% YoY). Prepaid ARPU was higher at RM33 vs RM29 in 2Q20. The improvement in subs and ARPU came after Digi launched new entry-level prepaid plans.
• Higher operating cashflow. Operating cashflow was higher at RM652m vs RM545m while net debt to EBITDA was unchanged at 1.5x as cash reserves declined to RM365m vs RM519m in 2Q20 following loan repayments.
• Dividend declared. The Group declared its 3rd interim dividend of 4.1 sen/share, taking 9M20 dividends to 12 sen. We expect full year dividend of 16 sen, which translates into a yield of 4%.
• Guidance for 2020. Due to the lingering uncertainty on COVID-19, the management has adjusted its guidance slightly upwards to: a) low-to-medium single digit decline in service revenue, b) medium-to-high single digit decline in EBITDA, and c) 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 more lockdowns due to COVID-19, 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 3Q20 earnings came within our full year earnings expectation. We expect earnings momentum to carry into 4QH20.

Valuation/Recommendation

• Upgrade to BUY from HOLD with an unchanged target price of RM4.75 following the stock’s recent selldown with value re-emerges. Our target price is derived based on DCF valuation with a WACC of 5.8% and a long-term growth rate of 2%. Our target price also implies a 24.4x FY20F PE based on EPS of 18 sen.

Source: JF Apex Securities Research - 19 Oct 2020