• Stay NEUTRAL, new DCF-derived MYR4.10 TP from MYR4.18, 6% upside and 3.3% yield. 1Q22 results were slightly ahead of our expectations. While the pressure on core service revenues persisted from extended prepaid erosion, the full reopening of the economy is supportive of a recovery – this is alongside stronger business-to-business (B2B) and fibre broadband revenues. Our TP has been adjusted for a higher cost of equity assumption from rising bond yields. This also bakes in a 6% ESG premium.

• 1Q22 core PAT fell 22.4% QoQ as steady EBITDA and lower depreciation were offset by higher tax expenses (+128% QoQ) from the imposition of a prosperity tax. This formed 26% of our forecast (consensus: 21%). DiGi.Com has declared a first interim DPS of 2.9 sen (96% payout). Management has retained the headline targets for FY22, ie resumption in service revenue growth, flat EBITDA, and capex intensity at FY21 levels.

• Core service revenue fell 2.2% YoY in 1Q22 (-0.7% if digital revenue is excluded), as weaker prepaid revenue (-4% YoY) more than offset the 3% postpaid revenue growth. Core EBITDA and margin ticked up 0.5% QoQ and 2% on good cost efficiencies, ie lower opex.

• Prepaid still feeble but could see some reprieve ahead. Prepaid revenue slipped for a second quarter in a row (-1.7% QoQ, -4% YoY due to: i) The continuing tight competition (unlimited propositions in the market) and ii) subs dropping out from the previous Jaringan Prihatin plans (subsidised monthly commitments). Digi also noted seasonally lower usage of internet passes. Postpaid revenue inched higher (+0.6% QoQ) on subs growth, the upselling of fibre broadband (FBB) services, and B2B growth (+12% YoY). Over a third of Digi’s postpaid base are contracted, and it has netted >16,000 FBB customers to-date, mainly via upselling. Its FY22 guidance of a turnaround in service revenue is premised on the stabilisation of prepaid revenue. This is likely to be supported by the full reopening of the economy and borders to international travellers.

• Forecast adjustments. We lift FY22F-24F core earnings by 8-12% after factoring stronger revenue growth/ARPU assumptions from the recovery in economic activities. This is partially tempered by continued IT and digital investments. We also raise our cost of equity assumption to factor in the rise in bond yields, with the risk free rate raised to 4.25% vs 2.9% previously. This lowers our DCF- derived TP to MYR4.10. Keep NEUTRAL.

• Key downside risks are competition, weaker-than-expected earnings, and a negative merger outcome. Upside risks: Stronger-than-expected earnings and larger-than-expected capex savings.

Source: RHB Research - 5 May 2022