INVESTMENT HIGHLIGHTS

• 2Q19 normalised earnings dipped marginally by -0.5%yoy to RM387.7m, in view of weaker prepaid service revenue

• Steady growth in postpaid service revenue, fuelled by healthy demand from pre to post conversion and B2B

• Proportion of prepaid service revenue continue to shrink, in-line with the smaller pool of subscriber base

• 2H19 earnings to be supported by continued efficient operations as service revenue to be under pressure

• Downgrade to NEUTRAL with a revised target price of RM4.93

Healthier profit margin. Digi 2Q19 normalised earnings amounted to RM387.7m, a marginal decline of -0.5%yoy. This is despite a -4.3%yoy reduction in revenue to RM,1548.7m, primarily due to lower prepaid voice revenue (-27%yoy). Meanwhile, we observed that the profit margin grew healthier to 25% from 23.7% achieved in 2Q18. This is in view of continued efficient operations discipline across all business functions. Cumulatively, 1H19 normalised earnings came in at the lower end of our and consensus expectations, making up 45.7% and 47.6% of full year FY19 earnings respectively.

Double digit growth in postpaid subscriber. 2Q19 postpaid service revenue grew by + 10.0%yoy to RM648m. The group observed healthy demand emanating from pre to post conversion and B2B. As a result, the postpaid subscriber base enlarged by 10.2%yoy to 2,926k subscribers. Meanwhile, the group also managed to defend its ARPU at RM70/mth.

Sequential growth in prepaid subscriber. The prepaid service revenue for 2Q19 decline further RM751m (-13.2%yoy). The contraction was mainly attributable to smaller pool of subscriber of 8,438k (-6.3%yoy) which led to lower voice revenue of RM290m (- 27.1%yoy). In addition, ARPU also weakened further to RM29/mth from RM32/mth as at 2Q18.

Dividend. Digi announced 2Q19 dividend of 5sen per share. This led to cumulative 1H19 dividend of 9.3sen per share, a slight decline from 9.8sen per share announced for 1H18.

Source: MIDF Research - 15 Jul 2019