1Q19 results came in largely within expectations. DIGI is maintaining its FY19 guidance despite the still challenging market conditions and moderate 1Q19 performance. Post review, we have reduced our FY19E/20E earnings forecasts by 14%/11%, respectively, with a lower DCF-derived TP of RM4.55. Maintain MARKET PERFORM call.

Largely in-line. 1Q19 PATAMI of RM342m (-11.5% YoY) came in largely within expectations at 22% each of house/consensus’ full-year estimates. The lower YoY performance was mainly due to: (i) shift in prepaid mix following the reduction from the traditional voice and interconnect rate revision, which levelled prepaid revenue by 14% YoY, and (ii) lower PBT after the adoption of MFRS 16 accounting principles in 1Q19. Stripping off the MFRS 16 impact, PATAMI was lowered by 5.2% YoY to RM366m. It declared a lower first interim tax-exempt dividend of 4.3 sen (vs. ours of 4.7 sen; 1Q18: 4.9 sen), translating to a payout ratio of 98%.

New accounting principles. With effective from 1st of January 2019, DIGI has adopted MFRS 16 Leases using a modified retrospective approach (to complied, DIGI has removed those lease contracts (i.e. in leased circuit, fiber optic, domestic inter-connect fee, spectrum assignment, sites rental and etc. that committed for payments over the contractual lease term) from off balance sheet to the assets & liabilities columns). Post MFRS 16 impacts to 1Q19 income statement are as follows; (i) reduction of RM2m and MR81m in COGS and OPEX, respectively, (ii) increase by RM89m in D&A and RM26m in finance cost, as well as (iii) EPS dilution of 0.3 sen to 4.4 sen. All in, DIGI will see a larger impact to PBT (due to higher D&A and finance costs) than lease expenses (lower OPEX) at the transition period.

YoY, 1Q19 service revenue declined by 4.6% to RM1.4b, mainly attributed to the weaker Prepaid segment (-14% as a result of change in revenue mix to reduce dependency on legacy voice revenue). The dip, however, was partially cushioned by the higher Postpaid business (+9% to RM623m), mainly fuelled by growing subscriber base and steady ARPU. EBITDA, meanwhile, improved by 4% to RM806m with margin climbed to 53.4% (vs. 47.3% a year ago) as a result of the change in accounting principles. Stripping off the MFRS 16 impact, EBITDA declined by 6.7% with margin improving to 47.9% (vs. 47.4% in 1Q18) due to lower turnover.

QoQ, 1Q19 service revenue weakened by 3%, mainly due to lower Prepaid segment performance (-5.6%, impacted by the seasonal effect, interconnect rate revision and continued pre-to-postpaid conversions). DIGI’s total subscriber base was reduced by 409k to 11.2m after losing higher subscriber base in the Prepaid segment (-459k (to 8.4m)) following the decision to shift the subscriber mix and channel strategy to drive growth from higher internet uptake and reduce dependency on legacy voice services. The group's LTE/LTE-A population nationwide coverage has reached 89%/67% (vs. 89%/65% in the preceding quarter) in 1Q19.

Looking ahead, DIGI is aiming to pursue sustainable growth opportunities ahead with efficient operations and digital connectivity. Although market conditions remain challenging, DIGI is maintaining its FY19 guidance with an aim to achieve: (i) service revenue that is similar to FY18 level, (ii) low single-digit growth in EBITDA, and (iii) capex to service revenue ratio of 11-12%. Note that the above guidance excludes the impact of MFRS 16. All in, post taking MFRS 16 into the consideration, we expect the group’s service revenue to dip 4% YoY and record RM3.2b EBITDA in FY19.

Maintain MARKET PERFORM but with lower DCF-driven TP of RM4.55 (vs. RM4.65 previously). Post results review, we have reduced our FY19E/FY20E PATAMIs by 14%/11%, respectively, after reducing revenue forecast by 8% each (to account for the change in prepaid and device strategies) and taking the MFRS 16 accounting principle into consideration. Our new target price implies 12.6x/12.4x EV/EBITDA to our FY19E/FY20E earnings estimates. Risks to our call include: (i) lower-thanexpected service revenue growth, (ii) higher-than-expected OPEX, and (iii) stiffer competition.

Source: Kenanga Research - 23 Apr 2019