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Maintain NEUTRAL, new DCF-based TP of MYR3.65 from MYR4.10, 7% upside with c.4% FY22F yield. DiGi.Com’s results are in line, at 48% of our full-year forecast (consensus: 42%), with the prepaid business turning the corner. As expected, management reserved comments on the ongoing 5G wholesale and equity process, with Digi being operationally 5G-ready. We make minimal changes to our FY22 forecast, with a 10% discount imputed to our revised TP (6% ESG premium included) to factor in potentially lower-than-expected merger synergies.
Core earnings fell 14% QoQ on lower core EBITDA margin and higher financing cost (largely from interest rate swaps). The market’s earnings shortfall was likely on account of a more conservative prosperity tax assumed (1HFY22 effective tax rate (ETR) of 38.1%). A 99% payout equates to a 2.9sen/share interim DPS, ie in line.
Prepaid turns the corner (hopefully). After two quarters, service revenue rebounded (+1.3% QoQ) (ex-digital: +0.3% QoQ) from the turnaround in prepaid revenue (+0.2% QoQ, -4.2% YoY), higher fibre broadband (FBB) sales (+40% QoQ) and digital revenue (+22% QoQ). Digi noted that the rotational churn in the prepaid migrant segment is safely behind it, with continued positive growth in the Malaysian base/revenue. Postpaid mobile revenue inched up by 0.2% QoQ (+1.1% YoY) as the 1.2% subs growth was partially offset by extended ARPU erosion from competition and the take-up of entry-level plans.
Fibre revenue at 0.5% of service revenue, with good enterprise traction. FBB subs base (disclosed for the first time) grew 31.3% QoQ (QoQ: +4.3k QoQ/YoY: +16.3k) to 21k (<1% of mobile subs base) from good upselling efforts and stronger take-up of FBB-mobile bundles. Enterprise (B2B) revenue and subs were up 13% and 17% YoY in 2Q22, albeit with a lower sequential growth – given the timing of projects/contracts.
Stock sentiment to be capped until 5G debacle is fully resolved. Management flagged the downside risk to its earlier guidance from inflation- adjusted energy cost. This comes on top of the IT modernisation and network investments, with a mid- to- high double digit impact guided on an absolute basis. Additionally, Digi expects to incur some cost from the closure of the merger transaction in 2H22. We lower FY22F core earnings by c.2% post results, with FY23-24F forecasts maintained. With Digi’s share price down c.22% YTD, much of the 5G downside risks are priced in. That said, pending better clarity and guidance, we expect sentiment on the stock to be capped. Key downside risks: Greater competition, weaker-than- expected earnings and merger synergies. The opposite of these would present upside risks.
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....