9MFY20 CNP of RM953m (-12% YoY) and interim dividend of 4.1 sen missed our expectations as we had counted on better postpaid performance and lower costs. The earnings were within consensus. Broadband play with partnerships provide access to 3.7m households while its “bite-sized” products are well received, feeding data-hungry consumers. We cut our FY20E/FY21E earnings by 10%/6% but potential dividend yields remained attractive at c.4%. Maintain OP but with a revised DCF-driven TP of RM4.25 (from RM4.65, WACC: 7.1%, TG: 1.5%).

9MFY20 missed our expectations. 9MFY20 core net earnings of RM953m missed our estimates but deemed within consensus, making up 66% and 73% of respective full-year assumptions. The negative deviation on our part was mainly due to our stronger postpaid and lower cost assumptions. However, the recovery in sales in 3QFY20 materialised as expected. An interim dividend of 4.1 sen (YTD: 12.0 sen) was declared but this missed our initial 18.4 sen expectation on the back of our higher earnings optimism.

YoY, 9MFY20 total revenue was stagnant at RM4.59b (-1%), as device sales supported a 3% decline in service revenue. This came from poorer prepaid contributions (-6%) during the year as the MCO drove sim card consolidation and churning of inactive accounts. Postpaid contribution only tipped slightly (+1%) as early-year gains from prepaid migration was offset by progressive down-trading and the return to more affordable prepaid plans offering more data-centric propositions. As of 3QFY20, prepaid subscribers were at 7.66m users with ARPU of RM33/mth (3QFY19: 8.34m users, ARPU: RM29/mth). Postpaid subscribers came in at 3.02m users with ARPU of RM67/mth (3QFY19: 2.99m users, ARPU: RM71/mth). Core EBITDA registered at RM2.32b (-6% YoY) from higher device costs and traffic charges, translating to 9MFY20 earnings of RM953m (-12%) after accounting for one-off adjustments (refer to overleaf).

QoQ, 3QFY20 service revenue growth of 4% was driven by stronger Prepaid revenue (+10%) as consumers leaned towards better affordability during a post- MCO economy. In tandem with the higher revenue, 3QFY20 profits registered at RM321m (+7%).

Value-driven. While the group has not competed directly by offering fully “unlimited” mobile offerings as its competitors, DIGI continues to gain new users with its entry-level plans, with “bited-sized” add-ons to supplement higher data needs. Partnerships to provide home fibre broadband connection have taken shape from agreements with TM, Time dotcom and Allo. Collectively, it is estimated that DIGI has access to an addressable market of 3.7m households. Strategies to win involve the bundling of broadband and postpaid mobile packages for more competitive value to customers. Still, recent economic uncertainties pose some challenges to the group. These include the need for tighter credit screening of potential postpaid sign ups and the loss of migrant users, though we do not believe they are overly detrimental to group prospects.

Post-results, we cut our FY20E/FY21E earnings by 10%/6% on the back of softer postpaid ARPUs and more conservative operating cost assumptions. This also toned down our expected dividend payments from 18.4 sen/18.7 sen to 16.5 sen/17.6 sen from pay-out close to 100%.

Maintain OUTPERFORM but with a lower DCF-driven TP of RM4.25 (from RM4.65, previously). Our TP (based on WACC: 7.1%, TG: 1.5%) implies an EV/Fwd. EBITDA of 12,0x against our FY21E earnings. Despite the cut in earnings and adjusted dividends, DIGI’s position as the top dividend-yielder still remains firmly in place, enhanced by recent share price weakness. This is also in line with our belief that DIGI is the least affected during this unprecedented times, and by new competitive forces, mainly due to its already low-based ARPUs. EBITDA: medium single digit decline (flat-low single digit decli

Source: Kenanga Research - 19 Oct 2020