1QFY21 CNP of RM288m came above expectation, at 30% of our FY21 estimate. DPS of 3.4 sen also outperformed our FY21E DPS of 12.2 sen. PF365’s popularity continued to boost device sales. Entry-level postpaid plans dragged ARPU, but lifted subs. Total prepaid subs continued falling with migrant subs declining substantially, even as local subs rose. Between now and 2023, Digi targets growth of 20% for postpaid subs and 33% for B2B revenue. We raise FY21E/FY22E CNP by 22%/20% on better cost control assumptions. Maintain MP on a higher DCF-TP of RM3.75 (from RM3.55) from better earnings, WACC: 6.1%, TG: 1.5%.

1QFY21 above our expectation. 1QFY21 CNP of RM288m came above our FY21 expectation at 30%, but within street's expectation at 25%. DPS of 3.4 sen came above our FY21E DPS of 12.2 sen. The positive deviation from our estimate was mainly due to our overly high cost assumption.

YoY, 1QFY21 CNP fell 2.4% while revenue fell 0.6%. Device revenue rose 26% thanks to continued encouraging take-up of DIGI's PF365 bundle. Postpaid revenue fell 6% as ARPU fell 6% and subs rose 1%, as entry-level packages in the market continued to drag postpaid ARPU. Prepaid revenue fell 7% despite a 10% rise in ARPU, as prepaid subs dropped 10%. With the local Malaysian prepaid subs base rising 6.3%, this suggests a continuous overwhelming outflow of migrant subs. On the contrary, digital revenue rose 78% to RM80m as Digi’s digital solutions for enterprises picked up steam. EBITDA fell 2.5% mainly due to a 20% rise in device costs. A five-fold increase in net interest expense (from a low base) dragged PAT which came in 20% lower. Excluding non-core items, including a RM22m fair value loss on interest rate swaps, CNP fell by only 2.4%.

QoQ, CNP declined 14.5% while revenue fell by only 0.7%. Service revenue fell by a modest 1% as mobile revenues remained flat and digital revenue shrunk by 10%. Higher device, operations and maintenance costs dragged on EBITDA, which fell 3.8%. EBIT fell 13% as 4QFY20 saw lower depreciation after excluding a one-off RM50.7m write-off. As a result, CNP came in at 15% lower.

Moving forward. As Telenor and Axiata are currently seeking shareholders' approval for the Celcom Digi merger, Digi's management remains steadfast in driving business as usual. Among other targets in Digi's three-year growth plan, Digi is targeting to achieve a 20% growth in postpaid and fixed (FTTH) subscribers and a 33% growth in B2B revenue, both from 2020 base. In our view, their focus on the FTTH and B2B segments helps the Group mitigate risks of further ARPU declines. As migrant workers are unlikely to return to Malaysia in 2021, we foresee continued downward pressure on prepaid subs. We also expect Digi's digital channels (e.g. MyDigi) to continue gaining traction, improving its cash collection and bad debt management.

Post results, we raise FY21E/FY22E CNP by 22%/20% to RM1.16b/ RM1.19b on: (i) lower OPEX assumptions, as ours was previously too high, and (ii) +1% adjustment to FY22E revenue on stronger postpaid subs growth. We raise FY21E/FY22E DPS from 12.2 sen/12.6 sen to 14.8 sen/15.1 sen, assuming 99% payout ratio on EPS of 15.0 sen/15.3 sen.

Maintain MARKET PERFORM on higher DCF-TP of RM3.75. The revised TP is mainly due to higher earnings assumptions. Our WACC and TG assumptions remain intact at 6.1% and 1.5%, respectively. The stock is currently trading at 12.7x EV/EBITDA, +0.5SD to its 3-year mean, as the market is likely pricing in synergies from the proposed merger.

Risks to our call include: (i) proposed merger falls through, (ii) better/worse-than-expected service revenue, (iii) stronger-thanexpected OPEX, and (iv) stiffening competition.

Source: Kenanga Research - 26 Apr 2021