KEY INVESTMENT HIGHLIGHTS

• 3Q20 normalised earnings improved by +4.3%qoq of RM317.4m (+12.9%yoy), due to higher demand post MCO

• Prepaid segment staged a strong pick-up in demand as the 3Q20 revenue increased by +10.2%qoq

• Sustaining its capital spending with main focus on expanding fibre coverage and LTE-A deployment

• Lower 3Q20 dividend of 4.1sen (vs 3Q19:4.5sen) in-line with the weaker earnings performance

• Maintain NEUTRAL with an unchanged TP of RM3.95

In-line with our expectation. 3Q20 normalised earnings came in at RM317.4m, a decline of -11.2%yoy. Nonetheless, on a quarter-over quarter basis, the normalised earnings improved by +12.9%qoq as issues encountered during MCO dissipates. This led to 9M20 normalised earnings of RM894.9m (-17.0%yoy). As such, we view that Digi’s 9M20 financial performance came in within ours but below consensus expectations, accounting for 75.6% and 68.4% of full year FY20 earnings estimates respectively.

Rebound in service revenue. 3Q20 mobile service revenue declined by -2.8%yoy to RM1,374m, mainly in view of the roaming impact. However, on a quarter-over-quarter basis, there was a slight recovery of +4.3%qoq post MCO. The rebound was mainly due to healthy take-up of PhoneFreedom 365 and prepaid usages. There is also stronger traction on digital adoption from mass and B2B segments. As a result, the prepaid and digital revenue rebounded strongly to RM748m (+10.2%qoq) while postpaid revenue remains weak at RM626m (-2.0%qoq).

Postpaid customer base contracted for the second consecutive quarters. Digi’s subscriber base contracted to 10.7m customers (vs 3Q19:11.3m). Nonetheless, on a quarter-over-quarter basis, this is a slight improvement from 10.6m customers recorded in 2Q20. The recovery was mainly stemmed from the expansion in its customer base (+0.9%qoq). However, the postpaid customer base continue to contract for the second consecutive quarter.

Remain committed in its capital spending. Digi’s 3Q20 capital investment came in at RM134m, an increase of +12.6%yoy which represents a capex to service revenue ratio of 9.8% (vs 3Q19: 8.4%). This was mainly to cater for capacity upgrades and fibre network expansion, as well as strategic new and upgraded LTE-A site deployments. Note that the LTE-A coverage has reached 74% in 3Q20 as compared to 70% as at 3Q19.

Dividend. Digi announced 3Q20 dividend of 4.1sen per share, which translates into a 99.3% payout ratio. Cumulatively, 9M20 dividend amounted to 12.0sen (vs 9M19: 13.80sen), in-line with the lower earnings generated in 9M20. This is in-line with our expectations, accounting for 78.9% of our full year FY20 dividend estimates.

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

Target price. We are maintaining our target price for RM3.95 which is premised on DDM valuation methodology. Our target price implies a forward FY21 PER of 24.7x.

Maintain NEUTRAL. Since 2019, Digi’s revenue has been under siege mainly in view of the intense competition among the peers. The MCO which took place in 2Q20 had further impacted the group’s ability to generate revenue. It has also led to shift in revenue mix (i.e. lower voice and lower roaming revenues) which has negative implication on the profit margin. Fortunately, this concern was partially allayed by higher mix of postpaid revenue as well as cost improvement on the operating expenditure. The easing of the MCO would also help the group to regain the attrition in subscriber base. Nonetheless, we view that the group’s earnings would not return to 2019 level in the foreseeable term. This would also affect the dividend payment. Given the subdued earnings outlook, we opine that dividend yield would hover around four percent. All factors considered, we are maintaining our NEUTRAL recommendation on the stock.

Source: MIDF Research - 19 Oct 2020