INVESTMENT HIGHLIGHTS

• 3QFY17 earnings impacted by lower prepaid revenue and higher depreciation and amortisation expenses

• Demand for the postpaid plans remains encouraging, partially supported by the deployment of 900Mhz spectrum band

• Capital spending slowed down in 3QFY17 after accelerating network deployment efforts in 1HFY17

• Maintain NEUTRAL with an unchanged target price of RM5.02

Weaker quarterly performance. Digi.com Bhd (Digi) posted 3QFY17 earnings of RM384.6m. After adjusting for foreign exchange (forex) and fair value movement of forward forex contracts of –RM2.1m, the normalised earnings amounted to RM386.7m (-11.8%yoy). The drop in normalised earnings was mainly due to lower prepaid service revenue as well as higher depreciation and amortisation expenses. Note that the increase in depreciation and amortisation expenses was in view of the deployment of 900Mhz and 1,800Mhz spectrum in 1st July 2017.

This led to lower 9MFY17 normalised earnings of RM1,121.3m, a reduction of -32.1%yoy. All in, the group’s 9MFY17 financial performance came in within ours and consensus expectations, accounting for 72.7% and 72.6% of FY17 full year earnings estimates respectively.

Steady growth in the postpaid segment. 3QFY17 postpaid service revenue improved by +13.9%yoy to RM557m. Strong demand for its new postpaid plans broadened the subscriber base to 2.4m (+20.1%yoy). However, 3QFY17 postpaid ARPU decreased to RM77 per month (3QFY16: RM80 per month). This indicates that the majority of Digi’s postpaid customers are more incline to subscribe for the RM50 per month postpaid plan.

Non-internet prepaid subscribers turning away. The prepaid service revenue declined to RM919m (-13.7%yoy) as at 3QFY17. This was impacted by lower ARPU of RM32 per month (VS 3QFY16: RM34 per month) and higher churn rate in the non-internet prepaid users. The non-internet prepaid users reduced to 3.1m (-22.3%yoy), while the internet prepaid users recovered to 6.4m users.

Capital expenditure (capex). 3QFY17 capex subsided to RM152m from RM202m a year ago after accelerating network deployment efforts in 1HFY17. Cumulatively, 9MFY17 capital spending amounted to RM578m. This represents capex to service revenue ratio of 13.1%, in-line with the management’s guidance.

Impact. No change to our earnings estimates at this juncture.

Dividend. In tandem with the lower quarterly earnings, Digi announced 3QFY17 dividend of 4.9sen per share. This is 0.7sen lower as compared to 5.6sen per share announced in 3QFY16. Cumulatively, 9MFY17 dividend amounted to 14.2sen per share, a reduction of -11.8%yoy.

Target price. We maintain our target price to RM5.02 per share, deriving it based on DDM valuation methodology. Our target price implies a forward FY18 PER of 24.5x.

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. 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. As expected the deployment of the 900Mhz has created positive impact on the postpaid segment by creating a more balancing playing field with its peers. However, we expect to see further earnings dilution from the prepaid segment as we are anticipating Webe to rollout its prepaid plans in 4Q17. This could potentially disrupt the prepaid market. All factors considered, we are maintaining our NEUTRAL recommendation on the stock.

Source: MIDF Research - 19 Oct 2017