1H17 results came in within our, but below the streets, expectations. A second interim tax-exempt dividend of 4.6 sen was announced. Digi has reduced its FY17 service revenue guidance following an uninspiring 1H performance. Post results review, we trimmed our FY17E/FY18E earnings by 4% each. Maintain MARKET PERFORM rating but with lower DCF-driven TP of RM4.85 (WACC: 6.2%, TG: 1.5%).

In-line. 1H17 PATAMI of RM732m (-11% YoY) came in within our but below market expectations at 47%/45% of house/consensus’ full-year estimates. The lower performance (on a YoY basis) was mainly impacted by: (i) the weak prepaid business (-13.5% YoY to RM1.9b service revenue), no thanks to the lower contribution from legacy services (mainly from IDD services, 3rd party contents and pay-per-use Internet services) as a result of intense competition, (ii) higher depreciation, and (iii) higher net financing cost (+109% YoY to RM63m) following the issuance of RM900m Sukuk in April-2017. As expected, it declared a second interim tax-exempt dividend of 4.6 sen (ex-date: 29th

of August), bringing total DPS to 9.3 sen in 1H17 (1H16: 10.5 sen). For the full financial year, we expect DIGI to reward shareholders with 19.3 sen DPS (vs. consensus 20.7 sen), implying a yield of 3.9%.

YoY, 1H17 service revenue declined by 6% to RM2.9b, mainly attributed to the weaker Prepaid segment (-13.5% as a result of aggressive competition, softer consumer sentiment, and weaker MYR). The dip, however, was partially cushioned by the higher postpaid business (+11% to RM1.05b), mainly driven by favourable take-up for entry level 4G plans, affordable device bundles and pre-to-postpaid conversions as well as solid interests from exclusive online deals. EBITDA, meanwhile, stayed at RM1.4b with margin improving to 45.7% (vs. 43.5% in 1H16) on the back of a well-managed cost structure.

QoQ, 2Q17 service revenue contracted by 1.4% as the growth in the postpaid segment (+3%) failed to offset the decline in the prepaid business (-4%). Group’s EBITDA, however, inched higher by 0.8% with higher margin (46.2% vs. 45.3%) thanks to (i) realisation of one-time savings in network related cost and (ii) lower USP fund as a result of thinner revenue. DIGI’s total subscriber base improved to 12.0m (2.1% QoQ) after attracting higher subscriber base in the prepaid (151k (to 9.7m) and postpaid (103k (to 2.3m) segments. The group's LTE/LTE-A population nationwide coverage has reached 86%/45% (vs. 85%/42% in 1Q17) with 8,000KM fibre network being built.

Lowered FY17 service revenue guidance. Followed the uninspiring 1H17 result, DIGI has revised its service revenue growth target to a low-mid single-digit decline as compared to flattish year-on-year growth previously. The decline is expected to come from the IDD segment, where DIGI has diverted its focus to other segments to yield better margin. Its EBITDA margin, meanwhile, is expected to maintain at FY16 level (at c.45%) alongside capex at 11%-13% of service revenue. The key priorities in the remaining months include: (i) continue strengthening its foundation in the postpaid segment to embrace digital transformation, and (ii) improve and stabilise prepaid operations with stronger Internet revenue growth and data monetisation. All in, while we concur with the management's view; the country’s top three incumbents are likely to face stiff competition ahead in view of the growing acceptance of U Mobile, which network quality is set to be improved significantly post the activation of the 900Mhz and 1800Mh spectrums. Besides, the prolonged weak consumer spending sentiment could potentially weigh on the group’s data monetisation road-path.

Trimmed FY17/FY18E net profits by 4% each, after: (i) revising the service revenue growth annual target to -5%/+2.5% (from -4%/+2% previously), and (ii) raising interest expenses assumption. Correspondently, our DCF-driven TP is lowered to RM4.85 (form RM4.86 previously).

Source: Kenanga Research - 13 Jul 2017