1QFY20 earnings of RM332.0m (-3%) and interim dividend of 4.2 sen are within expectations. Subscribers continued shifting from Prepaid to Postpaid plans. For now, Covid-19 repercussions on the industry may be unclear but we expect any negative impact to be minimal given the highly essential nature of telco services. We maintain our DCF-driven TP of RM4.65 (WACC: 7.2%, TG: 1.5%) but downgrade it to MP (from OP) due to recent share price recovery.

1QFY20 as expected. 1QFY20 net profit of RM332.0m is within expectations, making up 23%/24% of our/consensus full-year estimates. An interim dividend of 4.2 sen was declared, also deem to be in line with our assumption. We anticipate a total payout of 18.4 sen (based on 99% payout).

YoY, 3MFY20 total revenue of RM1.56b rose by 3% after enjoying higher device sales during the period. Service revenue, however, had a flattish dip to RM1.39b (-<1%). This was a result of lower Prepaid contributions (- 5%) as Postpaid (+5%) plans and device-bundled packages continued to gain popularity, of which we suspect some market share could have been lost to other competitive offerings in the market. As at 3MFY20, Prepaid subscribers stood at 7.95m users with an ARPU of RM30/mth (3MFY19: 8.40m users, ARPU: RM29/mth) while Postpaid subscribers came in at 3.06m users with an ARPU of RM69/mth (3MFY19: 2.86m users, ARPU: RM71/mth). EBITDA came in a RM755.6m (-6%) mainly due to greater device costs incurred to support the higher sales, and at the same time with higher spend from greater contract renewals and plan upgrades. Supported by more favourable net interest cost, this translated to a 3MFY20 net profit of RM332.0m (-3%).

QoQ, 1QFY20 service revenue fell by 4% due to the overall decline in both Prepaid (-3%) and Postpaid (-4%) contributions. However, this was skewed by 4QFY19 being seasonally stronger from year-end device launches. With relatively stable operating costs, the softer top-line led to 10% earnings decline.

Forted against Covid-19 threats. With the implementation of the MCO, telco players stepped forward to offer free daily internet to subscribers during the period. For now, management is not overly concerned about the heightened internet usage stressing their network capacity and costs. That said, works have been ongoing to ensure uncompromised network quality. As physical stores experienced limited openings, more subscribers are transacting digitally, which we believe could bring about a new industry-wide norm and opportunity to rationalise store footprint. For now, management has maintained its FY20 guidance for a flat-to-low single-digit decline in revenue and EBITDA given that the effects of Covid-19 towards telco services are still unclear alongside risks of customer (and SMEs) defaulting on payments. We believe that any impact or revisions could be limited given the highly essential nature of its service.

Post-results, we leave our FY20E earnings relatively unchanged.

Downgrade to MARKET PERFORM (from OUTPERFORM) but maintain our DCF-driven TP of RM4.65. Our TP (based on WACC: 7.2%, TG: 1.5%) implies an EV/Fwd. EBITDA of 12.2x against our FY21E earnings. The stock has done well in recovering from the Covid- 19 induced market sell down, as investors seek solace in the telco sector’s perceived resiliency coupled with DIGI’s attractive dividend yields (c.4%). However, beyond riding potential industrial tides, DIGI’s outlook could appear lukewarm against peers with piquant news-flows. Though we believe there is limited capital upside at current price levels, the stock remains the best dividend yielder in the industry with handsome ROE of +200%, a preferred trait for some investors.Risks to our call include: (i) stronger/weaker-than-expected service revenue, (ii) stronger/weakerthan-expected OPEX, and (iii) stiffer competition.

Source: Kenanga Research - 24 Apr 2020