9M17 results came in within expectations and showed sequential service revenue growth (after two consecutive quarters of decline), underpinned by higher data revenue. A third interim tax-exempt dividend of 4.9 sen was announced. Moving forward, DIGI is aiming to ride on the on-going postpaid and Internet growth momentum as well as driving stronger prepaid Internet subscriptions and monetisation. No changes in its FY17 financial guidance. Post results review, we fine-tuned our FY17E/FY18E earnings by c.-1% each. Maintain MARKET PERFORM rating with unchanged DCF-driven TP at RM4.85 (WACC: 6.2%, TG: 1.5%).

No surprises. 9M17 PATAMI of RM1.12m (-11% YoY) came in within expectations at 74%/72% of house/consensus’ full-year estimates. The lower YoY performance was mainly impacted by: (i) the weak prepaid business (13.6% YoY drop in service revenue to RM2.8b), no thanks to the declining legacy voice and messaging services, (ii) higher depreciation & amortisation (partly contributed by commencement of 900Mhz and 1800Mhz spectrum amortisation beginning 1 July), and (iii) higher net financing cost (+59% YoY to RM74m) following the issuance of RM900m Sukuk in April-2017. As expected, it declared a second interim tax-exempt dividend of 4.9 sen (ex-date: 21st of November), bringing total DPS to 14.20 sen in 9M17 (9M16: 16.10 sen). For the full financial year, we expect DIGI to reward shareholders with 19.0 sen DPS (vs. consensus 19.6 sen), implying a yield of 3.9%.

YoY, 9M17 service revenue declined by 6% to RM4.4b, mainly attributed to the weaker Prepaid segment (-14% as a result of aggressive competition and softer consumer sentiment). The dip, however, was partially cushioned by the higher postpaid business (+12% to RM1.6b), mainly fuelled by expanding 4G+ network along with solid postpaid acquisitions, internet usage and subscriptions. EBITDA, meanwhile, stayed at RM2.16b with margin improving to 45.9% (vs. 44.9% in 9M16) on the back of a well-managed cost structure. QoQ, 3Q17 service revenue advanced by 1.6% backed by stabilised prepaid revenue and continued strong postpaid revenue uplifts. Group’s EBITDA, meanwhile, inched higher by 1.4% with stable margin. DIGI’s total subscriber base was reduced to 11.8m (-1.5% QoQ) after attracting higher subscriber base in the postpaid (103k (to 2.4m) but lost 281k net adds (to 9.4m) in the prepaid segment. The group's LTE/LTE-A population nationwide coverage has reached 87%/49% (vs. 86%/45% in 2Q17) with 8,000KM fibre network being built.

FY17 financial guidance stayed. The group is setting the path towards solid Internet growth and stabilising prepaid revenue. Moving forward, DIGI aims to continue riding on the on-going postpaid and Internet growth momentum as well as driving stronger prepaid Internet subscriptions and monetisation. The group remains comfortable on its FY17 financial guidance and aims to achieve: (i) low-to-mid digit decline in service revenue growth, (ii) stable EBITDA margin (similar to FY16 level at c.45%), and (iii) capex to service revenue ratio of 11%-13%.

Stabilising prepaid revenue but…. DIGI’s prepaid segment has shown stability in 3Q17 with service revenue managed to turn around and grew by 0.2% QoQ after declining for three consecutive quarters. The trend, however, remains in check given that the turnaround in 3Q17 was mainly driven by higher internet revenue growth (+8.7% QoQ to RM364m) fuelled by various festive and public holidays.

Balance sheet remains healthy. The group’s net debt/EBITDA ratio remained healthy at 0.7x, with solid financial strength and funding flexibility to fund investment opportunities and operational commitments. DIGI had established RM5b Islamic bond facilities (Sukuk) in 2Q17 with an aim to record a net debt/EBITDA ratio of <1.0x in FY17 and <2.0x over the next three years (after taking the potential spectrum costs into the consideration).

Source: Kenanga Research - 19 Oct 2017