FY16 results came in within expectations. A fourth interim tax-exempt dividend of 4.8 sen was announced. Despite challenges ahead, Digi expects its FY17 service revenue & EBITDA margin to remain steady at CY16 level. Post results review, we trimmed our FY17E earnings by 2.0% to align with management’s earnings guidance. Maintained MARKET PERFORM but with a slightly lower TP of RM4.74 (from RM4.79 previously), based on targeted FY17E EV/forward EBITDA of 13.0x (representing an unchanged -1.0x standard deviation below its 2-year mean). FY16 PATAMI of RM1.63b (-5.2% YoY) met expectations, accounting for 96% each of our/consensus full-year estimates. Overall, the FY16 performance was mainly impacted by the price and data quotas-centric competition (especially the prepaid segment) as well as higher OPEX (due to higher IDD cost on the back of weaker MYR). As expected, it declared a fourth interim tax-exempt dividend of 4.8 sen (ex-date: 1 March), bringing its full-year DPS to 20.9 sen (FY15: 22.0 sen) and translating into a dividend yield of 4.2%.

YoY, FY16 total revenue declined by 4.6% to RM6.6b, mainly attributed to the weaker prepaid segment (-6.6% as a result of aggressive competition and weaker consumer sentiment) coupled with smaller devices & other revenue (-35%). Group’s PATAMI declined by 5.2% in line with the lower top line performance. QoQ, 4Q16 service revenue growth levelled at 0.1% as the higher post-paid segment (supported by its robust 4G+ network nationwide and higher prepaid to post-paid conversions) was partially offset by lower prepaid segment performance. EBITDA, meanwhile, dipped by 4.5% with margin lowered to 44.3% (vs. 47.9% in 3Q16), no thanks to the higher device sales and progressive 4G+ network expansion during the quarter.

Digi’s total subscriber base improved to 12.3m (1.4% YoY) with record high post-paid net adds recorded in 4Q16 (at 105k to 2.1m). Its prepaid segment shown some stability in 4Q16 with net loss narrowing to 55k vs. 138k in the preceding quarter. Active Internet subscribers improved to 8.1m (1.6% QoQ) or 66% of total subscribers. The group's LTE/LTE-A population nationwide coverage has reached 85%/41%, with 4.2m subscribers (or c.35% of its total subscriber base).

FY17 earnings guidance. Despite market condition remaining challenging in 2017, Digi aspires to turn in stronger performance than the industry with improved efficiencies and service revenue & EBITDA margin at around 2016 level alongside with capex at 11%-13% of service revenue. The key priorities in FY17 will focus on relentlessly growing postpaid and prepaid opportunities while defending core service revenue streams. All in, we concur with the management's view and believe the industry will continue to remain stagnant while waiting for the next growth opportunity (i.e. data monetisation or etc.) to arise.

Trimmed FY17E net profit by 2.0% to RM1.67b after lowering our service revenue growth annual target to align with management’s latest guidance. Meanwhile, we also take this opportunity to introduce our FY18E figures where we expect Digi’s service revenue to record an organic annual growth of 1%. Correspondingly, its net profit is expected to record a mild improvement of 1.3%, align with its top line performance coupled with a better operational efficiency.

Source: Kenanga Research - 24 Jan 2017