DIGI’s 9MFY22 results came in broadly in-line with our forecast but missed consensus estimates. Its subscribers, in both prepaid and postpaid segments, continued to grow but ARPU fell slightly on account of the end of the Jendela Prihatin programme in Sep 2022. The company reiterated its guidance for a rebound in service revenue in FY22 but expects a slight dent to EBITDA margin on merger cost and inflationary pressures. We maintain our forecasts, TP of RM4.25 and OUTPERFORM call.

Broadly in-line with our, but fell short of market, expectation. Its 9MFY22 CNP of RM703m made up 71% and 69% of our full-year forecast and consensus’ estimates, respectively. We consider the results broadly within our expectation but missed consensus. A DPS of 3.4 sen declared brought cumulative DPS to 9.1 sen (implying a 101% payout) vs. our full year expectation of 12.6 sen.

Results highlights. YoY, revenue declined 3.4% to RM4.6b underpinned by a slower performance from service revenue (-1.7%) to RM3.9b. EBITDA (at RM2.2b) declined by 1.6% but margin improved by 90bps to 48.6%. CNP declined 17% YoY to RM703m as ETR came in at 35% on account of Cukai Makmur. QoQ, revenue was flattish at RM1.53b while EBITDA saw a 1% uptick at RM749m with margin seeing similar uptick (70bps) to 48.9%. ETR saw 9ppts erosion to 30% on tax penalty refund and deferred tax.

DIGI’s mobile subscribers continued to grow (+2.8% YoY and +2.0% QoQ) to 10.7m; the postpaid segment grew for the 8th consecutive quarter (+1.2% QoQ, 3.5% YoY) to 3.4m while the prepaid segment continued to be on an uptrend (+2.3% QoQ, +2.5% YoY). The postpaid subscribers grew on higher demand for high-speed subscriptions, attractive bundling and contract offers while the prepaid saw stronger demand from the local population as well as certain higher-yield migrant subscribers. Blended ARPU fell by RM1 for the quarter dragged by a RM2 fall in prepaid ARPU attributed to the end of the Jendela Prihatin programme offset by higher broadband ARPU. Postpaid ARPU saw its first recovery since 1QFY20 with an uptick of RM1 to RM60.

Both the home broadband and B2B segments continued to be robust growing YoY and QoQ. The home broadband grew 4x to 25k from a year ago with 4.6k subscribers added in 3QFY22. ARPU was up RM30 to RM130 underlining healthy contracting activities and take-ups from its existing mobile base. B2B saw growth in both revenue and subscription with revenue rising 13% YoY and 3% QoQ while subscription grew 18% YoY and 2% QoQ as customers embraced digitalisation while sales were up by 12% YoY and 3% QoQ. The quarter saw the highest subscriber growth since 4QFY20 coming from higher take-ups from both SMEs and large enterprises.

Key takeaways from the results briefing are as follows:

1. No change in the company’s guidance of a rebound in service revenue driven largely by the gradual return of migrant workers coupled with higher demand from both postpaid and B2B on higher internet adoption and attractive bundles.

2. It reiterated its guidance for FY22 capex to be at 13% of total revenue (which is consistent with FY21). With the coming of 5G, the company expects gradual reduction in capex and cost-of-goods sold in the coming years.

3. It maintained its #1 network position with higher download speeds and consistency. 4G coverage is at 95% and 80% for 4G LTE and 4G Plus respectively (vs 92% and 75%, respectively). Download speed was at 45.6Mbps (2QFY22: 44.1 Mbps). Data traffic posted consistent growth at 8% YoY and 6% QoQ. The company sees 4G as the main traffic carrier in the next few years.

4. Blended mobile ARPU declined due to the ending of the Jaringan Prihatin programme impacting prepaid ARPU. The company expects prepaid ARPU to normalize in 4QFY22 back to the level of RM32-RM33. Booster for prepaid ARPU ahead will come from the launch of its ‘Prepaid NEXT Unlimited RM40’ a bundling to attract both migrant and domestic customers.

5. The company is confident that the Celcom Digi merger will be completed by end of 2022. It is now seeking Bursa’s approval and preparing for EGM approval.

Earnings maintained, no change to our FY22F earnings of RM990m and EBITDA margin assumption of 47%.

Investment case. We like DIGI for: (i) it being a recovery play with its B2B segment driven by the re-opening of the economy while its prepaid segment is underpinned by the return of foreign workers, (ii) its superior EBITDA margin at 47%-48%, vs. the industry average of 41%, and (iii) the merger with Celcom, giving birth to a new market leader in the mobile market with combined market share of 44%.

Reiterate OUTPERFORM. TP is maintained at RM4.25 to reflect our valuation for Celcom DIGI post the merger. Our TP is based on 10x FY23F EV/EBITDA for Celcom DIGI. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Risks to our call include: (i) the proposed merger between DIGI and Celcom fails to materialise, (ii) unfavourable terms to mobile network operators with regards to the 5G rollout, and (iii) irrational competition between players.

Source: Kenanga Research - 21 Oct 2022