9M18 results came in within expectations, underpinned by solid postpaid and internet revenues. DIGI is keeping its FY18 guidance largely unchanged despite the challenging market conditions. Post review, we reiterate our MARKET PERFORM call with an unchanged targeted DCF-driven TP of RM4.65 (WACC: 6.6%, TG: 1.5%).

In-line. 9M18 PATAMI of RM1.16b (+4% YoY) came in within expectations at 77% each of house/consensus’ full-year estimate. The better YoY performance was mainly fuelled by: (i) strong postpaid growth and internet uptake from the prepaid segment, and (ii) higher EBITDA margin as a result of effective 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 3.4% YoY to RM1.1b. As expected, it declared a third interim tax-exempt dividend of 5.0 sen (vs. 3Q17: 5.0 sen), bringing its 9M18 DPS to 14.8 sen.

Impact of MFRS15. To recap, 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, the impact to 3Q18 income statement are as follows; (i) reduction in RM37m in service revenue, and (ii) RM65m increase in device revenue, and (iii) RM3m hike in OPEX. All in, the accounting of MFRS15 has provided an uplift of RM25m to PAT and EPS uplift of 0.3 sen to 5.1 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, 9M18 service revenue softened by 1.1% to RM4.3b, mainly attributed to the weaker Prepaid segment (-7% as a result of continued levelling of legacy prepaid voice and messaging revenue). The dip, however, was partially cushioned by the higher Postpaid business (+9% to RM1.76b), thanks to the stronger acquisitions and plan upgrades. 9M18 EBITDA, meanwhile, improved by 6% to RM2.3b with margin firming to 47.2% (vs. 45.9% a year ago) on the back of an effective cost management. QoQ, 3Q18 service revenue weakened by 1.2% due to lower Prepaid (-3.5%) but partially mitigated by higher Postpaid segment (2.4%). DIGI’s total subscriber base strengthened by 114k to 11.8m after attracting higher subscriber base in the Postpaid segment (75k to 2.4m) and 69k net adds (to 9.0m, the first positive net adds since 2Q17) in the prepaid segment. The group's LTE population nationwide coverage reached 89%/61% (vs. 89%/58% in 2Q18) supported by 8,300km of fiber network nationwide.

Moving forward, the group will continue to pursue sustainable growth opportunities ahead with efficient operations and digital transformation. DIGI is maintaining its FY18 guidance with an aim to achieve: (i) flat growth in the service revenue, and (ii) 46-47% EBITDA margin, but it revised its capex to service revenue ratio to 11-12% (vs. 10%-12% previously). 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 0.2%/-1.9% with EBITDA at c.RM2.9b/RM3.0b (c.46% margin each) under the old/new accounting rules in FY18.

5G aspirations. Despite the authority already elaborated on its 5G aspirations recently, DIGI is of the view that it is still too early to outline any solid capex plan given the technology’s ecosystem & spectrum (where management is eyeing 3.5GHz spectrum to deploy the 5G services) have still yet to develop at this juncture.

Maintain MARKET PERFORM call with unchanged DCF-driven TP of RM4.65. Post results review, we have tweaked our FY18E/FY19E PATAMI by 0.4%/1.2% after some fine-tunings. DIGI remains our preferred pick for the sector due to its relatively resilient earnings and decent dividend yield. Risks to our call include: (i) lower-than-expected service revenue growth, (ii) higher-than-expected OPEX, and (iii) stiffer competition.

Source: Kenanga Research - 18 Oct 2018