FY18 results came in within expectations; underpinned by solid postpaid and internet revenues. Despite the challenging market conditions, DIGI is expecting similar performance in FY19. Post review, we reiterate our MARKET PERFORM call with an unchanged targeted DCF-driven TP of RM4.65 (WACC: 6.5%, TG: 1.5%), implied -1SD below its 5-year mean.

Within expectations. FY18 PATAMI of RM1.54b (+4% YoY) came in within expectations at 101% each of house/consensus’ full-year estimates. The better YoY performance was mainly fueled by: (i) stronger postpaid growth and the 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 1% YoY to RM1.46b. As expected, it declared a fourth interim tax-exempt dividend of 4.8 sen (vs. 4Q17: 4.6 sen), bringing its FY18 DPS to 19.6 sen.

YoY – stronger Postpaid and EBITDA growth. FY18 service revenue softened by 2% to RM5.8b, mainly attributed to the weaker Prepaid segment (-8.5% as a result of moderate demand for prepaid legacy services coupled with intense data price competition and abundance of data offers). The dip, however, was partially cushioned by the higher Postpaid business (+8.7% to RM2.4b), thanks to the stronger acquisitions and plan upgrades. FY18 EBITDA, meanwhile, improved by 5% to RM3.03b with margin firming to 46.5% (vs. 45.4% a year ago) on the back of an effective cost management. QoQ – resilient service revenue supported by solid Postpaid growth. 4Q18 service revenue stabled at RM1.4b as the dip in the voice revenue (-6% to RM474m) was mitigated by higher data revenue (+3% to RM963m). Despite solid service revenue, PATAMI weakened by 4% in 4Q18 mainly attributed to lower EBITDA (higher COGS led by a surge in demand for contracted device bundles and new PF365 program and higher staff costs) and higher taxation rate. DIGI’s total subscriber base contracted by 143k to 11.6m after losing 218k subscriber base in the Prepaid segment (no thanks to the intense data price competition and abundance data offers) but was partially offset by higher Postpaid users (+75k to 2.8m). The group's LTE population nationwide coverage reached 89%/65% (vs. 89%/61% in 3Q18) supported by 8,400km of fiber network nationwide. DIGI’s net debt to EBITDA ratio remained healthy at 0.8x while conventional debt over total assets steadied at 21%, well-within the Shariah threshold.

Looking ahead, DIGI is aiming to deliver sustainable service revenue growth and EBITDA development by providing better service to the existing base, growing the high ARPU base, maintaining network parity and operational excellence initiatives. Key priorities include: (i) capturing growth from existing customers, (ii) continue to drive postpaid growth and SME/B2B opportunities, (iii) deploy network for best Internet experience, (iv) continued focus and execution of operational efficiency initiatives, and (v) build ‘Customer Obsessed” and “Innovation 360’ culture, cultivate growth and efficiency mindset. All in, we concur with the management’s strategies and believe the group will be able to deliver growth and efficiency alongside its digital transformation agenda in FY19. DIGI, meanwhile, view the recent broadband launch in Jasin, Melaka, as an opportunity to widen its service but still require more studies if it intends to expand the service further.

2019 guidance. DIGI is aiming to achieve (i) service revenue that is similar to FY18 level, (ii) low single-digit growth in EBITDA (underpinned by the on-going digitalisation initiatives), and (iii) capex to service revenue ratio of 11%-12%.

Maintain MARKET PERFORM call (in view of its decent dividend yield (>4%) despite lack of major earnings catalyst). Post results review, we have tweaked our FY19E PATAMI by +3% (after some fine-tunings and taking management latest guidance into the consideration after some fine- tunings) and introduce our FY20 numbers. Risks to our call include: (i) lower-than-expected service revenue growth, (ii) higher-than-expected OPEX, and (iii) stiffer competition.

Source: Kenanga Research - 25 Jan 2019