Result

• Lower profit. Digi’s reported 4Q20 net profit declined 18% YoY to RM280m mainly due to higher finance costs attributed to finance lease liabilities under MFRS16 and fair value loss on interest rate swap.

• Revenue impacted by Covid-19. Quarterly revenue declined 7% YoY to RM1.56b due to lower non-internet revenue as Covid-19 impacted roaming, voice and interconnect revenue.

• Challenging QoQ. Net profit dropped 13% QoQ due to higher finance cost while revenue declined 1% QoQ following lower contribution from Prepaid (-2% QoQ) and Postpaid (-1% QoQ).

• Flattish EBITDA margin - Digi posted a lower EBITDA margin of 49% vs 50% in 3Q20 as despite lower costs as revenue declined.

• Earnings below expectation. 4Q20 net profit is below our expectation after accounting for 88% of our full year estimates but revenue is within expectation.

• Postpaid segment. Postpaid subscribers grew 22k QoQ to 3.04m while Postpaid ARPU was slightly lower at RM66 from RM67 in 3Q20 due to lower roaming and interconnect revenue.

• Prepaid segment. Prepaid subscribers decreased 260k QoQ to 7.4m due to losses in the migrant segment. Prepaid ARPU was slightly lower at RM32 vs RM33 in 3Q20.

• Higher gearing. Operating cashflow was lower at RM491m vs RM652m in 4Q20 while net debt to EBITDA was higher at 1.7x vs 1.5x in 3Q20 as financial lease rose 26% YoY to RM2.6b.

• Dividend declared. The Group declared its 4th interim dividend of 3.6 sen/share, taking FY20 dividends to 15.6 sen which fell short of our full year dividend forecast of 16 sen.

• Guidance for 2021. The management guide the following: a) low single digit decline in service revenue, b) medium single digit decline in EBITDA, and c) capex-to revenue ratio of 14%-15%

Comment

• We expect Digi to remain resilient with continued discipline in cost efficiency and strong cashflow amid challenges posed by Covid-19.

• Major risks include further impact from MCO 2.0, market competition from other telcos, 5G capex investment draining cash and lower-than-expected profit margin.

Earnings Outlook/ Revision

• We are lowering our earnings and revenue forecast for FY21F by 4% and 2% respectively as 4Q20 earnings came below expectation.

Valuation/Recommendation

• Downgrade to HOLD from BUY with a lower target price of RM4.23 (previously RM4.75) following lower dividend expectations. Our target price is derived based on DCF valuation with a WACC of 5.5% and a long-term growth rate of 2%. Our target price also implies a 24.4x FY21F PE based on EPS of 16 sen.

Source: JF Apex Securities Research - 29 Jan 2021