Period

1Q16

Actual vs. Expectations

1Q16 core NP of RM399m (-18.2% YoY) came in below expectations, accounting for 21.9%/22.5% of our/consensus full-year estimate, as well as lower than the historical 24%- 27% range recorded in the past two financial years.

Overall, the 1Q16 performance was impacted by the price & data quotas-centric competition (especially the prepaid segment) and seasonality factor.

On our end, the deviation was mainly due to the weaker-thanexpected prepaid revenue (-5% YoY) as a result of poorer ARPU.

Dividends

It declared a first interim tax exempt dividend of 5.1 sen (exdate: 25 May). For the full financial year, we expect Digi to declare 22.0 sen, translated into a dividend yield of 4.7%. Key Result

Highlights

YoY, 1Q16 revenue declined by 7.7% to RM1.6b mainly attributed to the lower service revenue (-1.8% as a result of the weaker prepaid segment) coupled with smaller device & other revenue (-54%). Its reported EBITDA, meanwhile, dipped by 9.2% with thinner margin of 42.6% (1Q15: 43.3%) as a result of lower revenue. Group NP declined by 18% to RM399m due to higher D&A expenses as a result of the rapid network expansion post-modernisation.

QoQ, 1Q16 revenue declined by 4.2% due to lower service revenue and device & other revenue. COGS, however, was lower by 10%, thanks to lower volume of smartphones sold while OPEX to service revenue ratio remained fairly steady at 30.9% as Digi continued its rapid expansion plan for its 4G LTE and LTE-A networks. Despite lower turnover, its EBITDA managed to inch higher to RM704m (+0.4%) with higher margin of 42.6% (4Q15:40.7%), driven by higher operational efficiency and sequentially stronger MYR.

Digi’s total subscriber base added 211k net adds in 1Q16 (to 12.3m) as a result of higher prepaid (149k) subscribers on the back of stronger subscribers’ acquisition activities. Digi's prepaid ARPU, however, dipped to RM35 from RM38 (as a result of aggressive reload freebies and increased exposure to multi-sim prepaid subscribers) while postpaid ARPU stayed at RM80.

Active internet subscribers rose to 7.9m or 64.2% of total subscribers. The group's LTE/LTE-A population nationwide coverage has reached 73%/33%, respectively with 2.3m subscribers (or 19% of its total subscriber base)

Outlook

While Digi is maintaining its FY16 guidance (flattish service revenue growth with sustainable EBITDA margin of c.45%), we are taking a more conservative stance given the persistent and heightened competition which could dampen the incumbents’ earnings prospect. We now expect the group’s service revenue to dip 2% in FY16 with 43% EBITDA margin.

Change to Forecasts

Trimmed FY16/17E EBITDA by 4.5%/4.6% after (i) lowering revenue by 3.2%/2.2% (on the back of lower prepaid segment ARPU and device & other revenue segment estimates), and (ii) raising our OPEX assumptions to align with the latest trend. Correspondently, our FY16/17E core NP are also lowered to RM1.72b/RM1.75b.

Rating

Maintained MARKET PERFORM

Valuation

In-tandem with our earnings downgrade, we have lowered our TP to RM5.05 (from RM5.24 previously) based on targeted FY16E EV/forward EBITDA of 13.6x, representing an unchanged targeted average 4-year mean.

Risks to Our Call

Downside risk : Intensifying competition.

Source: Kenanga Research - 25 Apr 2016