Result

• Steady earnings. Digi’s reported 3Q21 net profit declined 2.5% YoY to RM313m due to lower service revenue but normalised PAT grew 10% YoY to RM295m after excluding one-off effect in 3Q20.
• Flat revenue. Quarterly revenue added 0.3% YoY to RM1.58b due to higher Device sales, which grew 18% YoY to RM241m. Service revenue declined 2.3% YoY to RM1.34b as higher contribution from Postpaid failed to cushion the decline in Prepaid and Digital.
• Improved QoQ. Net profit rose 12% QoQ while normalised PAT increased 5% QoQ due to lower traffic, material, and sales & marketing costs. However, revenue dropped 2.1% QoQ following lower contribution from all Devices and Digital.
• Higher EBITDA margin - Digi posted a higher EBITDA margin of 49.7% vs 45.9% in 2Q21 amid lower costs.
• Earnings below expectation. 9M21 net profit is below our expectation after accounting for 64% of our full year estimates but revenue is above expectation after hitting 80% of FY21 forecast.
• More Postpaid subs. Postpaid subscribers grew 62k QoQ to 3.25m while Postpaid ARPU was slightly lower at RM63 from RM64 in 2Q21.
• Prepaid churn arrested. Prepaid subscribers increased 86k QoQ to 7.12m. Prepaid ARPU was slightly unchanged at RM34.
• Steady gearing. Net debt to EBITDA was slightly lower at 1.5x vs 1.6x in 2Q21 while operating cash flow margin improved to 39% from 34% in 2Q21.
• Dividend declared. The Group declared its third interim dividend of 4 sen/share, taking total dividend so far to 11 sen. Our full year dividend forecast stands at 16 sen, which translates into a yield of 3.8%.
• Guidance for 2021. The management provided the following: a) low single digit decline in service revenue, b) low-to-medium single digit decline in EBITDA, and c) capex-to-revenue ratio of 13%-14%.

Comment

• We expect Digi’s earnings and cashflow to improve as the economy reopens.
• Major risks include resurgence of Covid-19, market competition from other telcos, 5G capex investment draining cash, regulatory issues and roadblocks to merger with Celcom.

Earnings Outlook/ Revision

• We are lowering our FY21 earnings by 3% while lifting our revenue forecast by 7%.

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 27.3x FY21F PE based on EPS of 16 sen.

Source: JF Apex Securities Research - 22 Oct 2021