INVESTMENT HIGHLIGHTS

• 4Q18 normalised earnings lifted by the growth in postpaid revenue and resilient EBITDA margin of 44%

• Full year FY18 normalised earnings came in higher at RM1,510.3m (+3.9%yoy) in-line with our expectation

• In-line with the higher earnings, FY18 dividend totalled to 19.6sen as compared to FY17 dividend of 18.8sen

• Maintain BUY with an unchanged target price of RM4.89

Earnings recovery for FY18. Digi.com Bhd’s (Digi) 4Q18 normalised earnings came in at RM378.2m (+1.6%yoy). The improvement in earnings was mainly led by the growth in postpaid segment and reduction in operating expenditure (opex). The continued focus on operational efficiencies across sales and marketing activities and network operations contributed to opex reduction of -0.8%yoy. Cumulatively, this led to full year FY18 normalised earnings of RM1,510.3m (+3.9%yoy). All in, Digi’s FY18 financial performance met our and consensus expectations, making up 100.2% and 101.5% of full year earnings estimates respectively.

Steady growth in postpaid subscriber. 4Q18 postpaid revenue climbed by +15.0%yoy to RM667m, which constitutes 45.0% of total service revenue (4Q17: 38.3%). The improvement in postpaid revenue was premised on growing postpaid subscriber base of 2.8m, an increase of +13.1%yoy. There is also increase in plan upgrades, partially due to the Digi Phone Freedom 365 program. This contributed to resilient ARPU of RM77 per month.

Slower churn rate for the prepaid segment. As expected, the prepaid service revenue continues to trend lower, registering a decline of -12.6%yoy to RM815m as at 4Q18. However, on a quarter-onquarter basis, the rate of decline has reduced, owing to efforts to strengthen prepaid internet adoption and usage. Note that the proportion of prepaid internet subscriber has also risen to 75.3% from 72.6% as at 3Q18. Meanwhile, Digi was able to defend the prepaid ARPU at RM30.

Dividend. Digi announced 4Q18 dividend of 4.80sen per share. This is 0.2sen higher as compared to 4.6sen per share announced in 3Q18, inline with higher earnings achieved during the quarter-in-review. Cumulatively, full year FY18 dividend amounted to 19.6sen per share, up from 18.8sen per share from FY17.

Capital spending accelerated in 4Q18. 4Q18 capital expenditure (capex) came in higher at RM230m (+35.3%yoy) to expedite network deployment and capacity upgrades in preparation for 2019. This represents capex to service revenue ratio of 15.5% as compared to 11% as at 4Q17. Cumulatively, full year FY18 capex amounted to RM685m. There are extensive network and IT capacity deployment and fibre expansion to support increasing data demand. The coverage of LTE and LTE-A networks have reached 89% and 65% of population respectively.

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

Target price. We are maintaining our target price at RM4.89 per share. This is based on DDM valuation methodology. Our target price implies a forward FY19 PER of 24.2x.

Maintain BUY. The strategic shift in service revenue mix from prepaid to postpaid has bode well for the group. As at 4Q18, the ratio of postpaid to prepaid customer has risen steadily to 0.32 from 0.27 a year ago. This was supported by attractive and competitive postpaid internet proposition that Digi has introduced. We view that the higher proportion of postpaid revenue would also indicate better earnings stability. Meanwhile, EBITDA margin has been relatively stable at above 45%, supported by higher mix of internet revenue and efficient cost management. The improvement in earnings translates into better dividend payment as Digi paid almost all of its earnings as dividend. At this juncture, we view that Digi has the most attractive dividend yield of approximately 4.5% as compared to its peers. All factors considered, we are maintaining our BUY recommendation on the stock.

Source: MIDF Research - 25 Jan 2019