Result

• Earnings dragged by Cukai Makmur. Digi’s reported 2Q22 net profit dropped 21% YoY to RM220m mainly due to Cukai Makmur and deferred tax resulting in a higher tax rate of 39% while normalised PAT dropped 26% YoY to RM213m.

• Lower revenue. Quarterly revenue slipped 5% YoY to RM1.54b due as higher Postpaid revenue (+1% YoY to RM629m) failed to absorb the declines in Device sales (- 23% YoY to RM214m) and Prepaid revenue (-4% YoY to RM616m).

• Stable QoQ. Net profit dropped 7% QoQ while normalised PAT decreased 14% QoQ due to higher finance costs from non-cash hedge accounting and deferred tax. Revenue grew 1% QoQ mainly due to higher Digital revenue (+22% to RM73m).

• Lower EBITDA margin – Digi posted a lower EBITDA margin of 48.2% vs 48.7% in 1Q22 as EBITDA was flat at RM742m while revenue increased.

• Postpaid growth momentum. Postpaid subscribers grew 40k QoQ to 3.36m while Postpaid ARPU was slightly lower at RM60 from RM61 in 1Q22.

• Prepaid churn arrested. Prepaid subscribers increased 230k QoQ to 7.13m as Digi reversed its prepaid churn since 3Q21. Prepaid ARPU was slightly higher at RM33 vs RM32 in 1Q22.

• Steady gearing. Net debt to EBITDA improved slightly to 1.5x (from 1.6x in 1Q22) while operating cash flow decreased 13.4% QoQ to RM567m due to higher capex (+103.5% QoQ to RM175m).

• Dividend declared. The Group declared its second interim dividend of 2.8 sen/share, making it a total of 5.7 sen so far. We expect total dividend for FY22 to 14 sen, which translates into a yield of 4%.

• Guidance for 2022. The management maintained the following guidance: a) growth in service revenue, b) low single-digit decline to normalised EBITDA, and c) capex-torevenue ratio to be similar to 2021 (around 12.8%).

Earnings Outlook/ Revision

• Earnings below expectation. 1H22 net profit is below our expectation after accounting for 39% of our full year estimates while revenue was in line after achieving 49% of our FY22 forecast.

• We reduce our FY22 EPS forecasts by 9% to account for the lower–than-expected cost reduction.

• Major risks include market competition from other telcos, and cost reduction reaching its peak.

Valuation/Recommendation

• Following the recent slump in share price, we are Upgrading our recommendation to BUY with a lower target price of RM3.87 (previously RM4.09) after adjusting for higher risk-free rate and discount rates. Our target price is derived based on DCF valuation with a WACC of 6% and a long-term growth rate of 2.5%. Our target price also implies a 24.5x FY22F PE based on EPS of 14 sen. We are positive on the stock as the uncertainties related to DNB and merger with Celcom have been cleared and 5G could spur the company’s growth in the future.

Source: JF Apex Securities Research - 18 Jul 2022