Result

• Lower profit. Digi’s reported 1Q21 net profit declined 20% YoY to RM265m due to a RM22m fair value loss on interest rate swap.

• Steady revenue. Quarterly revenue declined 0.6% YoY to RM1.55b due to amid lower Postpaid and Prepaid revenue and higher Digital and Device revenue.

• Challenging QoQ. Net profit dropped 5% QoQ due to higher finance cost and depreciation and amortisation while revenue declined 0.7% QoQ following lower contribution from all segments except Device.

• Lower EBITDA margin - Digi posted a lower EBITDA margin of 47.5% vs 49% in 4Q20 as despite lower costs as revenue declined.

• Earnings below expectation. 1Q21 net profit is below our expectation after accounting for 20% of our full year estimates but revenue is within expectation after hitting 26% of FY21 forecast.

• More Postpaid subs. Postpaid subscribers grew 46k QoQ and 29k YoY to 3.09m while Postpaid ARPU was slightly lower at RM65 from RM66 in 4Q20 due to lower roaming.

• Prepaid churn continues. Prepaid subscribers decreased 240k QoQ to 7.16m due to losses in the migrant segment. Prepaid ARPU was slightly higher at RM33 vs RM32 in 4Q20.

• Steady gearing. Operating cashflow was higher at RM580m vs RM491m in 4Q20 while net debt to EBITDA was flat at 1.7x.

• Dividend declared. The Group declared its 4th interim dividend of 3.4 sen/share. Our full year dividend forecast stands at 16 sen, which translates into a yield of 3.8%.

• Guidance for 2021. The management reiterated 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 keeping our earnings and revenue forecast for FY21F. 

Valuation/Recommendation

• Maintain HOLD with an unchanged target price of RM4.23. 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 - 26 Apr 2021