1QFY17 results came in below expectations due to lower prepaid segment’s performance. A first interim tax-exempt dividend of 4.7 sen was announced. Digi is keeping its FY17 guidance unchanged. We, however, are taking a more conservative stance and believe the group may face a challenging time achieving its service revenue target. Post results review, we trimmed our FY17E/FY18E earnings by 7%/4%. Downgraded our DIGI rating to UNDERPERFORM with lower DCF-driven TP of RM4.86 (WACC: 6.2%, TG: 1.5%).

Below expectations. 1Q17 PATAMI of RM373m (-6.5% YoY) came in below expectations at 22%/23% of house/consensus’ full-year estimates. The weaker performance (on a YoY basis) was mainly impacted by the weak prepaid business (-13% YoY to RM952m service revenue), no thanks to the prolonged restrained consumer sentiment from macro economy headwinds coupled with weaker MYR as well as higher subscriber rotational churns as a result of continued intense competition. As expected, it declared a first interim tax-exempt dividend of 4.7 sen (exdate: 29th of May). For the full financial year, we expect DIGI to reward shareholders with 19.98 sen DPS (vs. consensus 20.8 sen), implying a yield of 3.9%.

YoY, 1Q17 service revenue declined by 5.6% to RM1.5b, mainly attributed to the weaker Prepaid segment (-13% as a result of aggressive competition, softer consumer sentiment, and weaker MYR. Meanwhile, the shift from the low margin IDD segment (to stronger internet proposition in targeted segments) also led to lower revenue contribution). The dip, however, was partially cushioned by the higher Postpaid business (+12% to RM520m), thanks to the robust internet revenue coupled with solid acquisition momentum that was mainly fuelled by exclusive online offers, and pre-to-postpaid conversions. Group’s PATAMI declined by 6.5% in line with the lower top line performance. QoQ, 1Q17 service revenue contracted by 5.3% as the growth in the Postpaid segment (+2%) failed to offset the decline in the Prepaid business (-9%). EBITDA, meanwhile, dipped by 4% with margin improving to 45.2% (vs. 44.3% in 4Q16) on the back of a well-managed cost structure. DIGI’s total subscriber base was reduced to 11.8m (-4.2% QoQ) following a 613k (to 9.6m) contraction in its prepaid base but this was partially cushioned by the higher subscriber base in the postpaid segment (+90k to 2.2m). Active internet subscribers stayed at 8.1m or 68.4% of total subscribers. The group's LTE/LTE-A population nationwide coverage has reached 85%/42% which completed the re-farming of 900MHz network, once approval for activation is obtained.

FY17 earnings guidance remains unchanged. Despite challenges ahead, DIGI is expecting its service revenue and EBITDA margin to maintain at FY16 levels (at c.RM6.2b/45%) alongside capex at 11%-13% of service revenue. The key priorities in the remaining months will focus on operational efficiencies as well as building stronger foundation to embrace digital transformation. All in, we concur with the management's view but believe the group may face some challenging time in achieving its service revenue target judging from the lacklustre 1Q17 performance as well as persistently high rotational churn (especially in the prepaid segment) as a result of intense competition.

Trimmed FY17/FY18E net profit by 7%/4%, after lowering the service revenue growth annual target to -4%/+1.9% (from +0.1%/+1.3% previously) and raised operations & maintenance costs assumption. In view of the challenges ahead, we have downgraded the stock to UNDERPERFORM (from MARKET PERFORM previously) with lower DCF-driven TP of RM4.86 (from RM4.98 previously).

Source: Kenanga Research - 2 May 2017