6M19 Net Profit of RM734.0m (-5%) and interim dividend of 5.0 sen per share both came within expectations. However, management trimmed its FY19 guidance on the back of a trying market environment of which we believe we have sufficiently accounted for. Post-results update, we adjust our FY19E/FY20E earnings by +3.0%/+2.5%. Maintain MARKET PERFORM and DCF-driven TP of RM4.70 (based on a WACC: 7.2%, TG: 1.5%).

6M19 within expectations. 6M19 Net Profit of RM734.0m (-5%) was within our and consensus expectations, making up 54% and 49% of respective full-year estimates. An interim dividend of 5.0 sen was declared, which we deem to be within our expectations. This brings YTD total dividend to 9.3 sen (99% payout) per share.

YoY, 6M19 revenue of RM3.06b dipped by 6% following softer Prepaid segment sales (-13%) but with a growing data revenue proportion (2Q19: 54%). On the flipside, Postpaid revenue improved by 10% on higher conversion from Prepaid subscribers and encouraging take-ups from entry level plans. EBITDA of RM1.65b registered a 10% increase, mainly arising from the change in accounting treatment towards leases from MFRS 16. Reversing this, the pre-MFRS 16 EBITDA would be RM1.48b (-2%). This still demonstrates a better cost environment for the group led by leaner operating methods. 6M19 Net Profit registered at RM734.0m (- 5%).

QoQ, 2Q19 grew by 3% led by better Postpaid results while Prepaid numbers saw the same weaker landscape as mentioned above. The EBITDA growth of 5% was boosted by lower traffic costs, which spilled over to the higher 2Q19 Net Profit of RM392.5m (+15%), also backed by lower effective tax of 19.9% (-4.6ppt).

Recalibrating expectations. Following this set of results, management updated their pre-MFRS 16 guidance for FY19, being: (i) service revenue to experience a low single-digit decline (from similar to FY18 levels), and (ii) EBITDA to also see a same low single-digit decline (from low single digit growth, previously). Capex to service revenue ratio guidance of 11- 12% was maintained. The revision comes as a result of the persistently challenging market landscape for subscribers with an appetite for more data-related products. On a larger picture, we believe DIGI has flexed significant amounts of legwork in keeping costs tightly controlled and could ride with the shifts in market trends readily.

Post-results, we tweak our FY19E/FY20E earnings by +3.0%/+2.5% following statistical updates from the results.

Maintain MARKET PERFORM and DCF-driven TP of RM4.70. Our target price (based on WACC: 7.2%, TG: 1.5%) implies an EV/Fwd EBITDA of 12.0x/11.7x against our FY19E/FY20E earnings. Overall, DIGI remains a more compelling option in the telco space owing to its market leader position and highly efficient cost management, while commanding the highest dividend yield of 3.5%/3.6% for FY19/FY20. However, trading valuations could be overly bullish at this moment, spearheaded by the planned merger between Telenor Asia and the Axiata group. Currently, the terms of the deal have yet to be finalised, pending a due diligence.

Risks to our call include: (i) stronger/weaker-than-expected service revenue, (ii) stronger/weaker-than-expected OPEX, and (iii) stiffer competition.

Source: Kenanga Research - 15 Jul 2019