1HFY20 CNP of RM632m (-12% YoY) and interim dividend of 3.7 sen are deemed within expectations. We see DIGI to have survived the MCO period well with new product launches looking to recapture market share. FY20E earnings guidance has been reintroduced with some downside bias revision, which we believehavebeen sufficiently accounted for in our forecasts. Maintain OP and DCF-driven TP of RM4.65 (WACC: 7.2%, TG: 1.5%).

1HFY20 within expectations. 1HFY20 core net earnings of RM632m is deemed to be within expectations, making up 44%/47% of our/consensus full-year estimates. We anticipate the slower MCO-ridden 1HFY period to be compensated by some recovery in 2HFY20. An interim dividend of 3.7 sen (YTD: 7.9 sen) is also in line with our expected total payout of 18.4 sen (99% payout).

YoY, 1HFY20 total revenue of RM3.01b (-2% YoY) stayed flattish. That said, service revenue fell by 3% as prepaid contributions saw an accelerated dip (-8%) due to MCO in 2QFY20 which drove sim card consolidation and churning of inactive accounts. Postpaid revenue was still growing (+4%) thanks to early-year customer migration from Prepaid. As at 2QFY20, Prepaid subscribers stood at 7.59m users with an ARPU of RM29/mth (2QFY19: 8.44m users, ARPU: RM29/mth) while Postpaid users came in at 3.03m users with an ARPU of RM68/mth (2QFY19: 2.93m users, ARPU: RM70/mth). Core EBITDA registered at RM1.54b (-6% YoY) from higher device costs and traffic charges. This translated to a 1HFY20 core earnings of RM632m (-12% YoY) after accounting for one-off adjustments (refer to overleaf).

QoQ, 2QFY20 service revenue dropped by 5% from lower revenue in both Prepaid and Postpaid segments. Although the Prepaid segment saw a bigger churn, similar to the above, total contributions could have been impeded by the complementary 1GB mobile data offered during the MCO period. Despite this, as interconnect and marketing costs were restrained during the period, core EBITDA grew by 4%. However, core net profit ultimately ended 10% lower at RM300m from higher depreciation and interest expense.

Chafed but pulling through. It was expected that the March-June 2020 MCO would lead to some shake ups with slowing economic activity and loss of income being the biggest threat to the telco industry. While DIGI was not immune to its effects, we believe its loss of subscribers (mostly Prepaid) from sim card consolidation and involuntary churning to be beneficial, improving its customer quality. The group has now reignited its customer acquisition initiatives with new “bite-size” prepaid plans with partially unlimited data offerings and partnerships to provide home fibre broadband connection. Although this is likely to spark resurgence in the group’s marketing expense, we opine the sales growth traction seen could translate well to earnings. Meanwhile, the group presented its revised FY20E guidance, being: (i) a low single-digit decline in service revenue (from flat-low single digit decline), and (ii) medium single-digit decline in EBITDA (from flat-low single-digit decline). Capex guidance which is similar to FY19 (RM700m-RM800m) remains unchanged.

Post-results, we leave our FY20E earnings relatively unchanged for now as our present assumptions are already closely in line with the updated guidance.

Maintain OUTPERFORM with 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. We believe the present share price level offers an attractive buying opportunity for the stock, for its industry-leading dividend yields of +4%. This is backed by our belief that DIGI is the least affected during this unprecedented times, mainly due to its already low-based ARPUs. Additionally, the stock also leads in net margins (c.24% vs peers’ average of c.9%) which should provide greater buffer against any subsequent (and more severe) downturn.

Source: Kenanga Research - 15 Jul 2020