9MFY19 Net Profit of RM1.09b (-6%) and interim dividend of 4.5 sen per share are both within expectations. The migration from Prepaid to Postpaid looks to be a persistent trend. Meanwhile, we believe the group would stay focused in keeping its operating structure lean. Post-results update, we adjust our FY19E/FY20E earnings by +0.5%/+1.6%. Maintain MARKET PERFORM and DCF-driven TP of RM4.70 (based on a WACC: 7.2%, TG: 1.5%).

9MFY19 Net Profit of RM1.09b is within our and consensus expectations, making up 78% and 73% of respective full-year estimates. An interim dividend of 4.5 sen was declared, which we also deem to be within estimate. This brings YTD total dividends to 13.8 sen (99% payout) per share.

YoY, 9MFY19 service revenue of RM4.21b dipped (-3%) as a result of lower Prepaid contributions at RM2.26b (-13%) with 3QFY19 subscribers closing in at 8.3m (3QFY18: 9.1m) at an ARPU of RM29 (3QFY18: RM31). This likely came from a migration to more Postpaid usage with entry-level plans, driving segment revenue to RM1.94b (+10%). 3QFY19 Postpaid subscribers expanded to 3.0m (3QFY18: 2.7m) at an ARPU of RM71 (3QFY18: RM72). 9MFY19 EBITDA came at RM2.49b (+11%) after adopting MFRS 16 accounting treatments towards leases. At pre-MFRS 16 treatment, EBITDA would be RM2.20b (-4%). The better cost environment was led by the group’s emphasis on keeping operations lean. 9MFY19 Net Earnings recorded at RM1.09b (-6%) following higher interest charges incurred.

QoQ, 3QFY19 service revenue was flattish. Similarly, poorer Prepaid performance was made up by growth in Postpaid numbers. EBITDA, however, dipped slightly as traffic cost normalised (EBITDA margin: 53.5%, -1.3ppt). Due further to higher effective taxes of 27.1% (+7.2ppt), 3QFY19 Net Profit decreased to RM356.0m (-9%).

Customers come first. During the results conference call, management highlighted an expanded capex guidance of 12%-13% of service revenue from 11%-12%. Emphasis to improve its network capabilities paints the group’s efforts to enhance customer experience. The push to gain traction through its easy device ownership programmes could also be a means to keep customers sticky. PreMFRS 16 EBITDA guidance for FY19 was also stretched from “low single-digit decline” to “low-medium single-digit decline”, with YTD at - 4.1%, which might be an indication of a softer 4Q19 ahead. We are not overly concerned by this as the group remains the most disciplined in cost management compared to peers while any concerns on expenses are not likely to translate into long-term implications.

Post-results, we tweak our FY19E/FY20E earnings by +0.5%/+1.6% 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 3.8%/3.9% for FY19/FY20. However, we reckon investors could be cautious given the soft nearterm industry outlook.

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 - 21 Oct 2019