Results

• Lower earnings. Digi’s reported 3Q22 net profit dropped 15% YoY to RM265m due to lower revenue, higher interest and higher tax rate (Cukai Makmur) while normalised PAT dropped 18% YoY to RM242m.

• Revenue decline. Quarterly revenue slipped 3% YoY to RM1.53b due as higher Postpaid revenue (+1% YoY to RM639m) failed to absorb the declines in Device sales (-11% YoY to RM213m) and Prepaid revenue (-7% YoY to RM602m).

• Better QoQ. Net profit rose 21% QoQ while normalised PAT increased 14% QoQ due to lower finance costs and lower tax. Revenue declined 0.5% QoQ mainly due to higher Prepaid revenue (-2% to RM602m).

• Stable EBITDA margin – EBITDA margin inched up to 48.9% vs 48.2% in 2Q22 as EBITDA grew 1% QoQ to RM749m while revenue decreased.

• Postpaid growth momentum. Postpaid subscribers grew 39k QoQ to 3.4m while Postpaid ARPU was slightly higher at RM61 from RM60 in 2Q22.

• Prepaid subs rebounded. Prepaid subscribers increased 167k QoQ to 7.3m as Digi reversed its prepaid churn with a recovery in the Migrant segment. Prepaid ARPU was lower at RM31 vs RM33 in 2Q22 as Digi approached the end of the Jaringan Prihatin assistance programme.

• Steady gearing. Net debt to EBITDA was unchanged at 1.5x while operating cash flow inched up 1.6% QoQ to RM576m while capex was flat at RM173m).

• Dividend declared. The Group declared its third interim dividend of 3.4 sen/share, making it a total of 9.1 sen so far. We expect total dividend for FY22 to 12.5 sen, which translates into a yield of 3.6%.

• 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-to-revenue ratio to be similar to 2021 (around 12.8%).

Earnings Outlook / Revision

• Earnings below expectation. 9M22 net profit is below our expectation after accounting for 65% of our full year estimates while revenue was in line after achieving 73% of our FY22 forecast.

• Earnings forecast reduced - We lower our FY22 EPS forecasts by 10% to account for the slower-than-expected revenue growth. We also reduce our FY23 revenue and EPS forecasts by 2% and 15% respectively.

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

Valuation and Recommendation

• Following the reduced forecasts, we are Downgrading our recommendation to HOLD with a lower target price of RM3.79 (previously RM3.87) after adjusting for lower dividend forecast. 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 21.3x FY23F PE based on FY23F EPS of 16 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 - 21 Oct 2022