DIGI’s FY22 results beat expectations largely due to low tax expenses in the fourth quarter. Subscriber base remained robust thanks largely to its competitive pricing. ARPUs for both Celcom and DIGI remained intact. Due to integration costs, the company guided for a low single-digit EBITDA growth. We reduce our FY23F earnings by 4%, tweak our TP down marginally to RM4.64 (from RM4.69) but maintain our OUTPERFORM call.

FY22 core net profit of RM1.2b (adjusted for one-off items largely merger related costs and accounting adjustments) beat our forecast and consensus estimate by 11% and 17%, respectively. The variance against our forecast came largely from low tax expenses in the fourth quarter (which will have little bearing on our FY23F numbers).

DPS declared of 12.2 sen (FY21: 11.8 sen) met our projection, translating to a 104% payout.

YoY, FY22 core net profit rose 9% on the back of a 7% increase in turnover, largely attributable to the consolidation of one month’s contribution from Celcom. At the EBITDA level, Celcom contributed RM243m or 7% of total EBITDA. Meanwhile, its margins remained robust at 49% (43% for Celcom and 48% for Digi).

QoQ, 4QFY22 core net profit jumped 29% on the back of a 42% surge in turnover, again, largely driven by Celcom as well as low tax expenses. At the EBITDA level, Celcom contributed 22% of 4QFY22 EBITDA.

Digi’s mobile subscribers continued to grow (7% YoY and 3% QoQ) to 11m; the postpaid segment grew for the 9th consecutive quarter (2% QoQ, 6% YoY) to 3.4m while the prepaid segment continued to be on an uptrend (3% QoQ, 7% YoY). Digi’s postpaid subscribers grew on higher demand for high-speed subscriptions, attractive bundling and contract offers while the prepaid segment saw stronger demand from the local population as well as certain higher-yield migrant subscribers.

On the other hand, Celcom’s subscribers fell 4% with prepaid and postpaid contracting by 5% and 1%, respectively

Postpaid ARPUs at both Digi and Celcom were stable. Digi ended the year at RM60 while Celcom finished at RM80. Celcom’s prepaid ARPU saw a 1% uptick QoQ to RM32 but that of Digi fell RM1 to RM30 due to the termination of Jaringan Prihatin. The ARPU of the combined entity DigiCelcom ended on a positive note at RM63 for postpaid while prepaid remained stable.

The key takeaways from the results’ briefing are as follows:

1. It guided for a low single-digit EBITDA growth from a proforma FY22 EBITDA of RM5.9b (12 months for both Digi and Celcom).

2. It guided for a capex-to-total-revenue ratio of 15%-18%, a tad higher than 13% in FY22 due to integration initiatives. The Integration initiatives will last for 2-3 years and hence the ratio is likely to stay at high teens (vs. 12% for Digi prior to the merger).

3. Having considered the high capex requirements, the company only commit to a dividend payout ratio of not less than 80%.

4. The new Mandatory Standard on Access (MSAP) standards recently announced by MCMC is expected to have a mixed impact to the company, a boon to the home broadband segment given the reduction in prices, while the impact to its mobile broadband segment depends the outcome of the renegotiation of commercial agreements with the other telco players.

We reduce our FY23F earnings by 4%, to synchronise our forecasts with the latest guidance, and introduce our FY24F numbers. Consequently, we also tweak our TP down marginally to RM4.64 (from RM4.69) based on 11x EV/EBITDA, at a 2x multiple discount to the sector’saverage historical forward EV/EBITDA of 13x to reflect the prevailing uncertainties surrounding the 5G rollout.

We like DIGI for: (i) the merged entity that will become well entrenched in the public sector and migrant worker space, commanding the dominant market share in the mobile market at 43% and dwarfing other MNOs, (ii) its competitive pricing and attractive bundling to attract migrant and domestic customers, (iii) the rollout of 5G that will likely further boost its subscriber base given the absence of MAXIS in this early stage of the rollout, and (iv) the superior EBITDA margins of both Digi and Celcom at 5−6ppts above the industry average of 41−42%. Maintain OUTPERFORM.

Risks to our call include: (i) regulatory risk with a more progressive-leaning political inclination, (ii) unfavourable terms to mobile network operators with regards to the 5G rollout, and (iii) competition between players turns irrational.

Source: Kenanga Research - 27 Feb 2023