Period

4Q15/FY15

Actual vs. Expectations

FY15 core NP of RM1.8b (-11% YoY) came in within expectations, accounting for 98%/97% of our/consensus’ fullyear estimates. Note that, the normalised NP was derived after adding back the net forex impact of RM90m.

Digi has achieved its FY15 earnings guidance (a low-mid single-digit service revenue growth; and sustainable EBITDA margin of c.45%) and delivered 0.2% YoY growth in its service revenue together with a 44.9% core EBITDA margin.

Dividends

It declared a fourth interim tax exempt dividend of 4.9 sen (exdate: 25 February), bringing its full-year DPS to 22.0 sen (FY14: 26.0 sen) and implied a payout ratio of 99.3%. Key Result

Highlights

YoY, FY15 revenue declined by 1.5% to RM6.9b mainly attributed to the lower device & other revenue (-18%) coupled with a flattish service revenue (0.2% to RM6.3b). Its reported EBITDA, meanwhile, dropped 5.7% with thinner margin of 43.1% (FY14: 45.1%), no thanks to the higher OPEX (+7% to RM1.9b) coupled with lower revenue. Group NP, meanwhile, declined by 15% to RM1.7b as a result of higher D&A expenses as a result of the rapid network expansion postmodernisation. At the normalised basis, its EBITDA and NP would have been lower at RM3.1b (-2%) and RM1.8b (-11%), respectively, if we exclude the forex impact.

QoQ, 4Q15 revenue improved by 3% due to higher device & other revenue while its service revenue remains relatively stable at RM1.6b (+0.2%). COGS increased 16% driven by seasonally higher device cost and increased traffic demand while OPEX to service revenue ratio increased by 120bps to 30.9% on the back of competition intensity and stronger subscribers’ acquisition activities. Core EBITDA margin (over its service revenue) weakened to 47.0% (vs. 49.2% in 3Q15) while reported EBITDA margin dipped to 40.7% as a result of higher traffic cost on the back of weaker Ringgit.

Digi’s total subscriber base added 450k net adds in 4Q15 (to 12.1m) as a result of higher prepaid subscribers (386k) on the back of stronger subscribers’ acquisition activities. Digi's prepaid ARPU managed to maintain at RM38 while postpaid ARPU was lowered by RM1 to RM80.

Data revenue accounted for 43.9% of 4Q15 (3Q15: 43.6%) total service revenue, thanks to the higher smartphone (59.2%) and Internet (61.9%) penetration rates. The group's LTE population nationwide coverage has reached >65% with 2.3m subscribers (or 19% of its total subscriber base)

Outlook

In view of the challenging economy outlook coupled with lower consumer spending, DIGI is expecting its FY16 service revenue growth and normalised EBITDA margin to come in at a similar level as FY15.

Change to Forecasts

Trimmed FY16 EBITDA by 7.2% after raising our OPEX assumptions to align with management’s latest guidance. Correspondingly, our core NP is also lowered to RM1.82b (- 6%). Meanwhile, we also take this opportunity to introduce our FY17E numbers.

Rating

Downgraded to MARKET PERFORM

Valuation

In-tandem with our earnings downgrade, we have lowered our TP to RM5.24 (from RM5.45 previously) based on targeted FY16E EV/forward EBITDA of 13.4x, representing an unchanged targeted average 4-year’s mean.

Risks to Our Call

Intensifying competition.

Source: Kenanga Research - 10 Feb 2016