1H18 results came in within expectations, underpinned by higher data and solid postpaid revenue. DIGI is keeping its FY18 guidance largely unchanged despite the still challenging market conditions. Post review, we reiterate our OUTPERFORM call with an unchanged targeted DCF-driven TP at RM4.90 (WACC: 6.3%, TG: 1.5%).

Within expectations. 1H18 PATAMI of RM770m (+5% YoY) came in within expectations at 53%/52% of house/consensus’ full-year estimates. The higher YoY performance was mainly underpinned by: (i) the better postpaid business (9.7% YoY increase in service revenue to RM1.16b) as a result of continued traction from prepaid to postpaid conversions, and (ii) higher EBITDA margin as a result of efficient cost management. Note that, DIGI has adopted MFRS 15 and 9 accounting principles since 1Q18. Stripping off the MFRS 15 impact, PATAMI is lower by 2.9% YoY to RM711m. As expected, it declared a second interim tax-exempt dividend of 4.9 sen (vs. 2Q17: 4.6 sen), bringing its 1H18 DPS to 9.8 sen.

Impact of MFRS15. To recap, with effective from 1 January 2018, DIGI has adopted MFRS 15 Revenue From Contracts With Customers using a modified retrospective approach (where the sale of device bundles with discounts will be affected by the timing of revenue recognition). Post MFRS 15’s impacts to 2Q18 income statement are as follows; (i) reduction in RM30m in service revenue, and (ii) RM62m increase in device revenue and RM7m hike in OPEX. All in, the accounting of MFRS15 has provided an uplift of RM25m to PAT, and (iii) EPS uplift of 0.3 sen to 4.9 sen. The MFRS 9, meanwhile, will have an impact on the balance sheet in relation to the classification and measurement of financial asset and the impairment model.

YoY, 1H18 service revenue declined by 0.4% to RM2.9b, mainly attributed to the weaker Prepaid segment (-6% as a result of continued levelling of legacy prepaid voice and messaging revenue). The dip, however, was partially cushioned by the higher Postpaid business (+10% to RM1.16b), mainly fuelled by its strong acquisitions and plan upgrades. 1H18 EBITDA, meanwhile, improved by 8% to RM1.5b with margin firming to 47.4% (vs. 45.7% a year ago) on the back of an effective cost management. Stripping off the MFRS 15 impact, its service revenue was up by 1.4% with EBITDA climbing 3% YoY, as a result of higher margin of 46.6%.

QoQ, 2Q18 service revenue weakened by 0.4% due to lower Prepaid (- 2.9%) but partially mitigated by higher Postpaid segment (4.7%). DIGI’s total subscriber base softened by 98k to 11.6m after attracting higher subscriber base in the Postpaid segment (84k (to 2.6m) but lost 182k net adds (to 9.0m) in the prepaid segment. The group's LTE/LTE-A population nationwide coverage has reached 89%/58% as compared to 88%/57% in 1Q18.

Moving forward, the group is aiming to pursue sustainable growth opportunities ahead with efficient operations and digital transformation. DIGI has tweaked its FY18 guidance marginally with an aim to achieve: (i) flat (vs. flat-to-low single digit decline previously) in service revenue growth, (ii) 46-47% EBITDA margin (vs. stable EBITDA akin to FY17 level at c.RM2.9b previously), and (iii) capex to service revenue ratio of 10- 12%. Note that the above guidance is based on the old accounting principles. All in, we expect the group to record YoY service revenue growth of 0.3%/-1.6% with EBITDA at RM2.9b/RM2.8b (c.46% margin each) under the old/new accounting rules in FY18.

Maintain OUTPERFORM call with unchanged DCF-driven TP of RM4.90 as bargain hunting opportunities may emerge post the recent sell-down. Besides, the decent dividend yield of 4.6% also could attract some yield seeking investors. Post results review, we have raised our FY18E/FY19E PATAMI by 4.5%/4.2% after lowering the traffic charges and OPEX marginally (to reflect the latest run-rate). Risks to our call include (i) lower-than-expected service revenue growth, (ii) higher-than- expected OPEX, and (iii) stiffer competition.

Source: Kenanga Research - 16 Jul 2018