FY17 results came in within expectations and showed second sequential service revenue growth (after two consecutive quarters of decline), underpinned by higher data revenue. Moving forward, DIGI is expecting its FY18 service revenue to record flat-to-low single-digit decline with EBITDA margin staying at around FY17 level. Maintain MARKET PERFORM rating with unchanged DCF-driven TP at RM4.90 (WACC: 6.3%, TG: 1.5%).

In line. FY17 PATAMI of RM1.48b (-10% YoY) came in within expectations at 99%/98% of house/consensus’ full-year estimates. The lower YoY performance was mainly impacted by: (i) the weak prepaid business (13% YoY drop in service revenue to RM3.7b), 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 (+66% YoY to RM109m) following the issuance of RM900m Sukuk in April-2017. As expected, it declared a fourth interim tax-exempt dividend of 4.6 sen (ex-date: 22 February), bringing the full-year total DPS to 18.80 sen (vs. 20.9 sen a year ago), implying a yield of 3.8%.

YoY, FY17 service revenue declined by 5% to RM5.9b, mainly attributed to the weaker Prepaid segment (-13% as a result of aggressive competition and softer consumer sentiment). The dip, however, was partially cushioned by the higher Postpaid business (+12% to RM2.2b), mainly fuelled by expanding 4G+ network along with solid Postpaid acquisitions, internet usage and subscriptions. EBITDA, meanwhile, stayed at RM2.9b with margin improving to 45.4% (vs. 44.8% in FY16) on the back of a well-managed cost structure. QoQ, 4Q17 service revenue climbed for second consecutive quarters and recorded 2.5% growth on the back of stabilised prepaid revenue and continued strong Postpaid revenue uplifts. Group’s EBITDA, meanwhile, stayed flat at RM725m despite margin softening to 44.1% (vs. 46.3%) as a result of higher demand for device bundles. DIGI’s total subscriber base was reduced to 11.7m (-0.9% QoQ) after attracting higher subscriber base in the Postpaid segment (85k (to 2.5m) but lost 190k net adds (to 9.2m) in the prepaid segment. The group's LTE/LTE-A population nationwide coverage has reached 87%/55% as compared to 87%/49% in 3Q17.

Showed positive data uptrend. Digi’s digital transformation has started to bear fruit and showed positive data uptrend driving revenue growth across the broad. Its Internet revenue has grown 16.5% YoY (to RM2.7b) and accounted for 43% (vs. 35% in FY16) of the group’s total revenue in FY17.

FY18 outlook. Digi aims to ride 2018 with a sharper focus anchored on further streamlining of operations and digital transformation. Key focus areas will be on (i) accelerating Postpaid and enterprise revenue growth, (ii) increase Internet adoption and usage among its migrant subscribers, and (iii) monetise data and grow Internet revenue. The group, however, is taking a guarded view on its FY18 guidance with an aim to achieve: (i) flatto-low single digit decline in service revenue growth, where management believes the current legacy plans may continue to cannibalise its top-line performance coupled with the new access pricing structure and MFRS 15 accounting standard, (where the sale of device bundles with discounts will affect the timing of revenue recognition), (ii) stable EBITDA margin (similar to FY17 level at c.45%), and (iii) capex to service revenue ratio of 11-12%. Note that the new access pricing structure is set to be effective from 1 January 2018 onwards and have a neutral impact to all the cellcos as the lower service revenue could be offset by the reduced network cost (as a result of the lower origination and termination rates). All in, we concur with management’s view and have adjusted our model accordingly.

Trimmed FY18 EBITDA by 4.0%, after revising our top-line and OPEX assumptions to align with management’s latest guidance. Correspondingly, our FY18 CNP is also lowered to RM1.45b (-6.5%). Meanwhile, we also take this opportunity to introduce our FY19E numbers.

Source: Kenanga Research - 24 Jan 2018