Review

• Digi announced its FY16 results, with a net profit of RM1,633mn (-14.5% QoQ, -5.2% YoY). This was within ours and street estimates at 99.3% and 96.8%. A fourth interim dividend of 4.8sen was declared (YTD: 20.9sen).

• QoQ. While service revenue (+0.1% QoQ) continues to stabilise, earnings fell on higher traffic (+9.5% QoQ) and sales & marketing (+13.9% QoQ) expenses. Traffic charges were inflated by the weaker ringgit (USD/MYR: +6.7% QoQ). Stronger postpaid revenue (+4.5% QoQ) gains helped offset a decline in prepaid service revenue (-2.0% QoQ). The prepaid segment continues to suffer from competitive pressures and subdued consumer sentiment.

• YoY. Amid the challenging environment, service revenue declined 1.9% YoY to RM6.2bn. The fall was mainly due to the prepaid segment, with service revenue declining 6.6% YoY. Prepaid ARPU moderated 10.5% YoY to RM34. Affecting its large migrant base, competition was intense in the IDD segment. Prepaid voice revenue declined 10.5% YoY. Aiming for a larger share of Malaysian subscribers, the group introduced its Digi Prepaid LiVE plan, targeted at the youth and entertainment oriented subscribers.

• Helping to cushion the trend, good gains were made in the postpaid segment. Postpaid subscribers reported its 11th consecutive quarter of net adds, totalling 2.1mn subscribers. This was supported by its network improvements, with a LTE and 4G+ population coverage of 85% (+20pp) and 41% (+12pp). A large part of subscriber gains were also due to the migration of prepaid to postpaid subscribers. Despite the larger subscriber base, postpaid ARPU improved slightly to RM81. Attainment of lower band spectrum later this year will further enhance its network quality, improving its in-building coverage.

• Costs were well controlled, as EBITDA margins improved 1.7pp to 44.8%. Traffic charges decreased 9.5% YoY, due to lower IDD traffic and a renegotiation of rates. Savings were also made to staff (-2.3% YoY) and sales & marketing (-1.4% YoY) expenses. However, this was offset by higher operations and maintenance (+27.9% YoY) costs, in line with network expansion activities.

• Its balance sheet remains healthy post spectrum fee payment. On 1st November 2016, it paid the one-time fee component of RM598.5mn for the 900MHz and 1800MHz spectrum. Net debt/EBITDA remains relatively low at 0.6x (from 0.4x).

Impact

• Adjusting forecasts to the latest guidance and imputing year end changes to our model, we lower our FY17/FY18 earnings by 1.5%/2.0% to RM1,621mn/RM1,639mn. We are now projecting flattish YoY service revenue and EBITDA. We also introduce our FY19 earnings of RM1,677mn.

Outlook

• Revealing its guidance for 2017, service revenue and EBITDA margin are expected to be maintained at 2016 levels. Capex to service revenue ratio is guided at 11-13% of service revenue. Management expects competitive and macroeconomic challenges to persist into 2017. This is in line with our view, as we believe competitive pressures will sustain due to the entrance of webe and efforts by Celcom to regain market share. Recent weakness in the ringgit may also pose challenges to traffic charges and squeeze its migrant’s wallet share.

• Opportunities are via its increased exposure to lower band spectrum. The group has been allocated 2x5MHz and 2x20MHz of 900MHz and 1800MHz spectrum. This is expected to translate into better indoor coverage and potential capex savings. Improved indoor coverage will allow it to better penetrate the enterprise segment.

Valuation

• We reduce our TP for Digi slightly to RM4.90/share (from RM4.95/share) – based on a DCF valuation with WACC at 7.7% and long term growth rate of 1.0%. Affected by weakness in its IDD segment, we are projecting a flattish performance for the group. As the outcome of its business trust structure remains in limbo, potential dividend yields are capped by existing earnings. We believe the stock is fairly valued as it trades slightly above its historical average, at an EV/EBITDA of 13.8x. SELL.

Source: TA Research - 24 Jan 2017