Result

• Earnings dragged by Cukai Makmur. Digi’s reported 1Q22 net profit dropped 11% YoY to RM236m due to Cukai Makmur with a higher tax rate of 33% while normalised PAT dropped 8% YoY to RM248m. This was despite COGS falling 9% YoY.

• Lower revenue. Quarterly revenue slipped 1.8% YoY to RM1.52b as higher Postpaid revenue (+2.6% YoY to RM63m) failed to absorb the declines in Digital revenue (- 25% YoY to RM60m), Device sales (-18.6% YoY to RM214m) and Prepaid revenue (-5% YoY to RM615m).

• Lower QoQ. Net profit dropped 22% QoQ while normalised PAT decreased 2% QoQ due to the one-off Cukai Makmur despite COGS falling 14%. Revenue declined 4% QoQ due to lower Digital revenue (-25%) and Prepaid revenue (-5%).

• Higher EBITDA margin – Digi posted a higher EBITDA margin of 48.7% vs 46.7% in 4Q21 as EBITDA was flat at RM741m whilst revenue declined.

• Postpaid growth momentum. Postpaid subscribers grew 40k QoQ to 3.34m while Postpaid ARPU was slightly lower at RM61 from RM62 in 4Q21.

• Prepaid churn flattening. Prepaid subscribers decreased 120k QoQ to 6.9m due to decline in the migrant segment. Prepaid ARPU was slightly lower at RM32 vs RM33 in 4Q21.

• Steady gearing. Net debt to EBITDA was steady at 1.6x while operating cash flow surged 46% QoQ to RM655m due to lower capex (-70% QoQ to RM83m) as a result of project deferments.

• Dividend declared. The Group declared its first interim dividend of 2.9 sen/share. We expect total dividend for FY22 to 15 sen, which translates into a yield of 4%.

• Guidance for 2022. The management provided the following: a) growth in service revenue, b) EBITDA to be similar to 2021 at RM3b, and c) capex-to-revenue ratio to be similar to 2021 (around 12.8%).

Earnings Outlook/ Revision

• Earnings below expectation. 1Q22 net profit is below our expectation after accounting for 19% of our full year estimates while revenue was 23% of our FY22 forecast.

• We reduce our FY22 EPS and revenue forecasts by 16% and 3% respectively to account for the slower –than-expected service revenue growth and stagnant opex reduction.

• 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.

Valuation/Recommendation

• Maintain HOLD with a lower target price of RM4.09 (from 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 23.8x FY22F PE based on EPS of 15.3 sen.

Source: JF Apex Securities Research - 5 May 2022