Macquarie Equities Research (MQ Research) upgraded DiGi from Underperform to Neutral despite its 9M19 results coming in below MQ Research’s estimates. The upgrade is attributed to DiGi’s big savings on debt with a reduction in its medium-term note’s borrowing costs by more than 1.0%. In a research report released last night (21 Oct), MQ Research also raised DiGi’s target price to RM4.24.

Event

• MQ Research upgrades its recommendation on DiGi from Underperform to Neutral with an increased price target of RM4.24 post 3Q19 results released on 18 Oct. While results were below MQ Research’s estimates, coming in at 70% of MQ Research’s forecasts in 9M19, MQ Research notes that DiGi has successfully raised new debt 103-105bps below previous tranches for similar maturities. This has led MQ Research to reduce its weighted average cost of capital (WACC) estimates leading to this upgrade. Operationally service revenues and earnings before interest, tax, depreciation and amortisation (EBITDA) are showing positive sequential trends. However, in light of muted growth (18-21E earnings per share (EPS) compound annual growth (CAGR) of 1%) and rich valuations (12x adjusted 20E enterprise value (EV)/EBITDA), MQ Research sees downside risk to its share price mitigated somewhat by a 4% dividend yield. For exposure to the Malaysian mobile space MQ Research prefers Maxis.

Impact

• Big savings on debt. MQ Research saw the 103-105bps reduction in borrowing costs for DiGi’s two RM450m Islamic Medium Term Notes (IMTN) as the most significant event from the 3Q19 result. The 7-year and 10-year notes carry profit rates of 3.5% and 3.6%, respectively. MQ Research has adjusted its long-run borrowing cost assumptions in its WACC to reflect these rates, resulting in a 0.5% reduction in MQ Research’s WACC estimates to 6.8%.

• Growing again. 3Q19 results also confirmed MQ Research’s thesis that the industry is showing signs of growth once again with headline price points largely stable. DiGi’s meticulous cost optimisation efforts will further aid margin recovery. Nonetheless MQ Research believes from a network standpoint, DiGi lags larger peers Maxis and Celcom, making it more susceptible to competition from uMobile.

• Dividend yields sustainable; but upside limited by profits. MQ Research sees DiGi’s 4% dividend yield as sustainable with growth in line with profits. While net debt to EBITDA at 1.2x (post FRS16) is low, DiGi’s dividend remains constrained by its ability to deliver profits given its historical bumper payouts.

Earnings and Target Price Revision

• FY19/20/21E core profit -7.6/-9.4/-5.0% on slower revenue recovery assumptions and Financial Reporting Standard 16 (FRS16) adjustments. Discounted cash flow (DCF) derived price target +5% to RM4.24 on lower WACC estimates (-0.5% to 6.8%) on lower long-term borrowing costs.

Price Catalyst

• 12-month price target: RM4.24 based on a DCF methodology.

• Catalyst: Delivery of positive albeit low growth trends in 4Q19 results.

Action and recommendation

Upgrade from Underperform to Neutral. MQ Research’s preference for Malaysia only mobile exposure is with Maxis on its better Enterprise-driven growth profile.

12-month Target Price Methodology

• DIGI MK: RM4.24 based on a DCF methodology

Source: Macquarie Research - 22 Oct 2019