FY19 core net profit of RM1.56b beat our expectations due to overly cautious cost estimates. Meanwhile, a full-year dividend payout of 18.2 sen (4Q: 4.4 sen) was in line. The group is moving towards a greater postpaid mix but may struggle to gain overall market share with FY20 guidance downside biased. 5G remains an uncertainty at present. Maintain MP with a slightly lower DCF-driven TP of RM4.65 (from RM4.70, WACC: 7.2%, TG: 1.5%)

FY19 came above. FY19 core net earnings of RM1.56b made up 110% and 103% of our and consensus’ full-year estimates. The positive deviation was from the lower-than-expected cost environment owing to one-off expenses seen during the year. An interim dividend of 4.4 sen was announced, bringing full-year payout to 18.2 sen, which is closely within our expected 18.1 sen (99% reported payout).

YoY, FY19 service revenue declined by 3% to RM5.65b on the back of weaker Prepaid contributions (RM3.00b, -12%) from lower 4QFY19 subscribers at 8.3m on lower interconnect rates while ARPU was stable at RM30/mth (4QFY18: 8.9m subscribers, RM30/mth). With entry-level plans and device-bundled packages, Postpaid service revenue stood at RM2.62b (+10%) where subscribers stood at 3.0m with ARPU of RM72/mth (4QFY18: 2.8m subscribers, RM71/mth). After adjusting for non-recurring expenses, and MFRS 16, Core EBITDA came to RM3.43b (+14%) while at pre-accounting standards, it would register at RM3.04b (- 3%). Cost management appears to be kept under control, thanks to the group’s strong cost discipline. FY19 core net earnings came in at RM1.56b (+1%) following higher interest charges incurred.

QoQ, 4QFY19 service revenue only grew slightly (+2%). However, total revenue was boosted by 7% thanks to higher device sales from seasonal year-end launches, which also pressed core EBITDA down by 2% on lower margin contributions. This translated to a softer 4QFY19 core net profit of RM367.9m (-2%).

Trying to hold it sideways. The group is pushing its cost management initiatives and constantly exploring avenues to trim costs. However, there could be a struggle to gaining new market, where industry subscriber numbers are evenly distributed amongst incumbents and inter-connect business is on the decline. Regarding changes in landscape with 5G looming around the corner and any potential participation in the consortium, management only mentioned that much are still being discussed. Our opinion is that 5G may not be adopted aggressively by retail consumers as its applications are not widely available at this moment but instead are likely to be more enterprise skewed. The softer sentiment above seems to be reflective of management’s guidance for FY20, namely a flat to low single-digit decline for service revenue and EBITDA while capex commitments could remain constant. However, there could be revision with 5G developments.

Post-results, we tweak our FY20E earnings by 1% from FY19 updates. We believe our assumptions are reflective of the soft top-line outlook. We also introduce our FY21E numbers.

Maintain MARKET PERFORM with a lower DCF-driven TP of RM4.65 (from RM4.70). Our TP (based on WACC: 7.2%, TG: 1.5%) implies an EV/Fwd. EBITDA of 12.1x against our FY20E earnings. In spite of the better results and upward revision of earnings, our new TP is lower as we adopt a more cautious margin environment in our coming projected financial years (until 2029). Still, in terms of operating efficiency, DIGI would be the preferred pick, offering the highest dividend yield amongst telcos at 4%. However, beyond riding potential industrial tides, DIGI’s outlook could appear lukewarm against peers with piquant news-flows.

Source: Kenanga Research - 23 Jan 2020