INVESTMENT HIGHLIGHTS

• 1QFY17 normalised earning weakened by -3.7%yoy, impacted by lower performance from the prepaid segment

• Deployment of 900Mhz in July 2017 will improve Digi’s competitiveness

• 4.7sen dividend declared for 1QFY17

• Maintain NEUTRAL with a revised target price of RM5.42 per share based on DDM valuation methodology

Within expectation. Digi.com Bhd (Digi) posted 1QFY17 earnings of RM373.1m. After adjusting for foreign exchange and derivative losses of -RM2.4m, the normalised earnings amounted to RM375.5m. This represents a slight decrease of -3.7%yoy. The drop in normalised earnings was mainly due to lower total revenue as profit margin remained relatively unchanged. All in, the group’s financial performance came in at the lower end of our and consensus expectations, accounting for 21.5% and 22.9% of FY17 full year earnings estimates respectively.

Steady double digit growth for the postpaid segment. 1QFY17 service revenue contribution from the postpaid segment posted an increase of +12.1%yoy to RM520m. Higher revenue was achieved in view of larger postpaid subscriber base of 2.2m (vs 1QFY16: 1.9m subscribers) and fairly steady ARPU of RM79 per month. There is favourable postpaid take-up for entry level 4G plans and prepaid to postpaid conversions.

Contraction in the prepaid segment. 1QFY17 prepaid service revenue fell below the RM1.0b mark to RM952m. Competition remained intense amid increasing headwinds for migrant segment. As a result, 1QFY17 prepaid subscriber base contracted to 9.6m from 10.4m subscribers as at 1QFY17. Meanwhile, ARPU dropped to RM32 per month from RM35 per month previously.

Capital expenditure (capex). 1QFY17 capex increased by +15.2%yoy to RM197m from RM171m as at 1QFY16. The higher capital spending was necessary to complete spectrum re-farming and deployment of LTE 900Mhz sites for capacity and network quality improvement. To recall, Digi will activate its 900Mhz spectrum on 1st

July 2017.

Impact. We are fine-tuning FY17 earnings downwards by -2.7% as we assume lower service revenue contribution from the prepaid segment.

Dividend. In tandem with the lower quarterly earnings, Digi announced 1QFY17 dividend of 4.7sen per share. This is 0.4sen lower as compared to 5.1sen per share announced in 1QFY16. In view of our revision in FY17 earnings, we reduce our FY17 dividend assumption to 21.7sen per share from 22.3sen per share previously.

Target price. We roll forward our valuation base year to FY18 and derived a new target price of RM5.42 per share based on DDM valuation methodology. Our target price implies a forward FY18 PER of 24.4x.

Maintain NEUTRAL. The overall subscriber base, ARPU and service revenue were undermined by the contraction in the prepaid segment in view of heightened competition among its peers. However, we observed that there is strategic shift in service revenue mix which will further enable digital opportunities. This has lead to continuous positive traction from the postpaid segment. We expect this positive trend to pick-up pace in 2HFY17 due to the anticipated deployment of 900Mhz which will create a more balanced playing field with its peers. This could potentially lead to a stronger 2HFY17 as compared to 1HFY17. On another note, we view that the stock offer attractive dividends yield of more than 4%. This is much higher in comparison to its listed peers. All factors considered, we are maintaining our

NEUTRAL recommendation on the stock.

Source: MIDF Research - 2 May 2017