Result

• Profit decline arrested. Digi’s reported 2Q21 net profit declined 2.8% YoY to RM280m due to higher cost of goods sold. However, normalised PAT grew 4.4% YoY to RM281m after excluding one-off fair value loss of RM22m in 2Q20.

• Higher revenue. Quarterly revenue grew 11% YoY to RM1.62b due to higher Device sales, which doubled to RM278m thanks to Prihatin subsidy. Service revenue rose 1.7% YoY as higher contribution from Prepaid and Digital cushioned the decline in Postpaid.

• Improved QoQ. Net profit rose 5.7% QoQ due to higher revenue growth of 4.4% QoQ following lower contribution from all segments except Digital.

• Lower EBITDA margin - Digi posted a lower EBITDA margin of 45.9% vs 47.5% in 1Q21 amid higher costs mainly due to non-recurring device costs of RM37m.

• Earnings below expectation. 1H21 net profit is below our expectation after accounting for 42% of our full year estimates but revenue is within expectation after hitting 53% of FY21 forecast.

• More Postpaid subs. Postpaid subscribers grew 95k QoQ and 153k YoY to 3.19m while Postpaid ARPU was slightly lower at RM64 from RM65 in 1Q21 due to lower roaming.

• Prepaid churn continues. Prepaid subscribers decreased 128k QoQ to 7.03m due to losses in the migrant segment. Prepaid ARPU was slightly higher at RM34 vs RM33 in 1Q21.

• Steady gearing. Operating cashflow was slightly lower at RM547m vs RM580m in 1Q21 while net debt to EBITDA was flat at 1.6x.

• Dividend declared. The Group declared its second interim dividend of 3.6 sen/share, taking total dividend so far to 7 sen. 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-torevenue ratio of 14%-15%.

• Merger update. The merger with Celcom is expected to be completed in 2Q22 and is currently making regulatory filings to relevant authorities for approvals.

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, 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 as we expect earnings momentum to pick up in 2H21 as vaccination efforts accelerate.

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 - 19 Jul 2021