FY20 CNP of RM1.28b (-10% YoY) is within estimates but full-year dividend of 15.6 sen fell short in our books. FY21 could be challenging as softer migrant prepaid subscriber base could impede top-line. Meanwhile, management will not shy from investing in the near-term to boost long-term capabilities. We slash our FY21E earnings assumption by 31% to be in line with guidance provided. Downgrade to UP with a lower revised DCF-driven TP of RM3.55 (from RM4.25, WACC: 6.1%, TG: 1.5%)

FY20 within expectations. FY20 core net earnings of RM1.28b is within our and consensus expectations, making up 98% and 99% of respective estimates. However, an interim dividend of 3.6 sen was declared, accumulating full-year dividends to 15.6 sen. We deem this as below our earlier expectation of 16.5 sen as dividends were paid in line with the -15% YoY drop in reported profits.

YoY, FY20 total revenue came in at RM6.15b (-2%) on lower service revenue (- 4%), mostly from poorer prepaid performance (-5%). The segment experienced sim card consolidation with the MCO that also drove lower tier accounts to be inactive. The loss of migrant workers also led to the segment’s decline, which was more prevalent in 4QFY20. Postpaid contributions also fell slightly (-1%) as ARPUs eroded with the preference for more affordable packages. As of 4QFY20, prepaid subscribers were at 7.40m with ARPU of RM32/mth (4QFY19: 8.25m users, ARPU: RM29/mth) while postpaid had 3.04m with ARPU of RM66/mth (4QFY19: 3.03m users, ARPU: RM71/mth). Following one-off adjustments, core EBITDA registered at RM3.14b (-5%) as a greater emphasis on bundle-based plans drove device costs. This translated to a lower CNP of RM1.28b (-10%).

QoQ, 4QFY20 service revenue tripped by 2% mainly on lower Prepaid performance. The segment was affected by a loss in migrant subscribers due to non-renewals of working permits and the economic slowdown brought by Covid-19. Although cost environment was inflated by higher traffic charges, core earnings expanded to RM331m (+3%) after reversing a one-off RM50.7m fixed asset write-off for scrapped assets.

Fortifying the line. For the moment, DIGI’s migrant prepaid customer base is threatened by further churning and suppressed influx of new workers into the economy. While management would not comment on the proportion of migrant subscribers to the group, they will emphasise on retaining their existing portfolio with personalised products. With lessons learnt from the unprecedented Covid-19 year, management looks to further modernise its channels to possibly extend its outreach to less assessable segments. Digitisation could also boost its competitiveness in the B2B market. Given that the group commands stellar industry leading margins (EBITDA: 50%), it can be argued that it has earned itself an allowance to spend more operationally to propel future capabilities. Management therefore introduced its guidance for FY21, being: (i) low single-digit decline in service revenue; (ii) medium single- digit decline in EBITDA; and (iii) 14-15% capex-to-service revenue ratio.

Post-results, we slash our FY21E earnings by 31% as we adjust our assumptions to coincide with the abovementioned guidance. That said, our newly introduced FY22E earnings reflect a 4% rebound on progressive economic recovery.

Downgrade to UNDERPERFORM with a lower DCF-driven TP of RM3.55 (from RM4.25). The fall in our TP is mostly owing to our earnings adjustments in the coming years, though we recalibrated our WACC to 6.1% (from 7.1%, previously) mainly from beta updates but keep our TG of 1.5%. Given the near- term earnings hurdles that the stock might face, DIGI’s dividend proposition is likely to be held back to level nearing 3% yield from 4% previously. Though we keep our assumptions at close to 100% payout, we do not discount that management might be more cash conservative to drive expansionary efforts.

Source: Kenanga Research - 29 Jan 2021