KEY INVESTMENT HIGHLIGHTS

• 3Q19 normalised earnings of RM360.1m was mainly impacted by higher depreciation and amortisation charges

• This lead to cumulative 9M19 normalised earnings of RM1,091.8m (-6.0%yoy), in-line with our expectation

• Higher 9M19 capex of RM548m (+20.4%yoy) to bolster the 4G network experience and digital connectivity

• Cumulative 9M19 dividend of 13.8sen on track to meet full year FY19 dividend estimates

• Maintain NEUTRAL with an unchanged TP of RM4.93
   

Resilient revenue. Digi.Com Bhd’s (Digi) 3Q19 normalised earnings amounted to RM360.1m which represents a decline of -7.4%yoy. The decrease was primarily attributable to a combination of higher depreciation and amortization (+50.9%yoy) and higher finance cost (+86.6%yoy). Meanwhile, 3Q19 revenue declined marginally to RM1.6b (-2.3%yoy) in view of lower voice revenue (-22.5%yoy).

Within expectations. Cumulatively, 9M19 normalised earnings came in at RM1,091.8m (-6.0%yoy), tracking the -4.9%yoy contraction in revenue to RM4,613.3m. All in, Digi’s 9M19 financial performance came in within ours and consensus expectations, making up 73.8% and 72.9% of full year FY19 earnings respectively.

Double digit growth in postpaid revenue… 3Q19 postpaid revenue improved by +10.4%yoy to RM666m. This was mainly due to healthy customers’ demand from Digi’s Phone Freedom 365, Digi postpaid family plans and entry level postpaid plans from prepaid conversions. As a result, the postpaid subscriber base grew to 2,993k (+9.6%yoy). At the same time, ARPU remained resilient at RM71.

...while prepaid revenue contracted at similar rate. On the contrary, 3Q19 prepaid revenue shrunk by -11.4%yoy to RM740m. This was mainly in view of mobile terminal rate reduction. Note that the prepaid internet revenue contribution improved to 55% of prepaid revenue, up from 48% as at 3Q18. However, the prepaid subscriber base dwindled by -8.1%yoy to 8,337k, while the ARPU reduced to RM29 from RM31 a year ago.

Capital expenditure (capex). Digi’s 3Q19 investment amounted to RM119m, leading to 9M19 capex of RM548m (+20.4%yoy). The investments were prioritised to optimised the 4G network quality with enhanced capacity through fibre network expansion to 9,200km an refarming of spectrum portfolio.

Dividend. Digi announced 2Q19 dividend of 4.5sen per share. This led to cumulative 9M19 dividend of 13.8sen per share, a slight decline from 14.8sen per share announced for 9M18. Nonetheless, this is still within our expectation, which constitutes 78.3% of our full year FY19 dividend estimates of 18.9sen.

Maintain NEUTRAL. We expect higher contribution from the pre-to-post conversion and B2B lead to better earnings visibility in comparison to prepaid. At present, the proportion of postpaid revenue as a percentage of total service revenue has improved further to 47.1% from 41.9% a year ago. Given the steady postpaid performance, we expect the contribution from postpaid to match that of prepaid by 2020. Meanwhile, we expect contribution from prepaid to disappoint further in 2H19 in view of the challenging market. This could potentially undermine the growth stemming from postpaid. Fortunately, we expect the discipline in cost management shown by the group to be able to partially uphold the group’s earning resiliency. Meanwhile, we view that the estimated dividend yield of at least four percent will keep investors to remain vested on the stock. All factors considered, we are maintaining our NEUTRAL recommendation on the stock.

Source: MIDF Research - 21 Oct 2019