Period

3Q15/9M15

Actual vs. Expectations

9H15 core NP of RM1.38b (-6.4% YoY) came in below expectations, accounting for 69.7% of our full-year estimate and 68.6% of the consensus. Note that, the normalised NP excluded the net forex impact of RM37m incurred in 3Q15.

On our end, the lower 9M15 performance (on a YoY basis) was mainly due to the weaker 3Q15 performance, no thanks to the: (i) lower-than-expected device sales, (ii) intense IDD and data price competition, and (iii) lower EBITDA margin as a result of higher forex impact.

Dividends

It declared a third interim tax exempt (single-tier) dividend of 5.1 sen (ex-date: 6 November), which translates into a 100.0% payout ratio, bringing its 9M15 DPS to 17.1 sen (9M14: 18.8 sen). For the full financial year, we expect Digi to declare 23.1 sen. Key Result

Highlights

YoY, 9M15 revenue declined by 0.6% to RM5.2b mainly attributed to stronger service revenue (+1.2% to RM4.7b) but partially offset by lower device & other revenue (-16.7% to RM428m). Its reported EBITDA, however, dropped 3.4% with thinner margin of 44.0% (9M14: 45.2%), no thanks to the higher OPEX (+7.6% to RM1.4b) coupled with lower revenue. Group NP, meanwhile, declined by 8.9% to RM1.34b as a result of higher D&A expenses. At the normalised basis, its NP would have improved to RM1.38b (-6.4%) if the steep fall on Ringgit (RM37m) is excluded from the account.

QoQ, 3Q15 revenue dipped by 2.8% due to lower device & other revenue while its service revenue remains relatively stable at RM1.58b (-0.3%). COGS decreased 3.5% in line with lower device sales while OPEX to service revenue ratio remained fairly resilient at 29.7% on the back of competition intensity and rapid expansion of data network. Normalised EBITDA margin (over its service revenue) weakened to 48.5% (vs. 49.6% in 2Q15 and 49.8% a year ago) while reported EBITDA margin (over its service revenue) dipped to 45.4% (2Q15: 49.6%; 3Q14: 49.8%) as a result of higher traffic cost on the back of weaker Ringgit.

Digi’s total subscriber base dropped 140k net adds in 3Q15 (to 11.6m) as a result of lower prepaid (-145k) subscribers, no thanks to the heightened competition. Despite lower net adds, Digi's prepaid ARPU managed to maintain at RM38 while postpaid ARPU was lowered by RM1 to RM81.

Data revenue accounted for 43.6% of 3Q15 total service revenue, thanks to the higher smartphone (58.4%) and Internet (60.2%) penetration rates. The group's LTE population coverage has reached 50% and is available in 28 major cities and secondary towns nationwide.

Outlook

DIGI is maintaining its FY15 earnings guidance, where the group is targeting to deliver a low-to-mid single-digit service revenue growth, together with a sustainable EBITDA margin which is similar to FY14 level (~45%).

Change to Forecasts

Trimmed our FY15E/FY16E NPs by 8.4%/6.4%, after lowering our device revenue assumption and raising operations & maintenance costs to reflect the latest runrate.

Rating

Maintained OUTPERFORM (due to the potential total upside of 13.9% (9.4% capital upside & 4.5% yield)).

Valuation

In-tandem with our earnings downgrade, we have lowered our TP to RM6.05 (from RM6.10 previously) based on targeted FY16E EV/forward EBITDA of 14.4x, representing an unchanged targeted +1.0x standard deviation above the 4-year mean.

Risks to Our Call

Intensifying competition.

Source: Kenanga Research - 27 Oct 2015