Review

• On a pre-MFRS 16 basis, Digi reported 3QFY19 core net profit of RM362mn (-12.6% QoQ, -7.8% YoY). This brought 9MFY19’s core net profit to RM1,142mn (-5.0%), which came within ours and consensus estimates at 74.4% and 76.3% respectively. Exceptional items include RM40mn of restructuring cost incurred in 2QFY18.

• Meanwhile, the group declared a 3rd interim dividend of 4.5sen/share (- 10.0% QoQ, -10.0% YoY). YTD dividend of 13.8sen/share (-6.8%) represents a payout ratio of 93.9%, which is consistent with its dividend policy of distributing at least 80% of net profit.

• Generally, Digi’s weak 9MFY19 results – revenue and core net profit declined 4.8% and 5.0% to RM4,619mn and RM1,142mn – reflect the continued weakness from its prepaid segment, which has been suffering from: 1) declining legacy voice and messaging services, 2) the reduction in regulated interconnect rate, and 3) heightened data competition.

• On a brighter note, in 3QFY19, service revenue grew sequentially for the 2nd consecutive quarter. This was driven by: 1) the postpaid segment’s sustained subscriber acquisition momentum, and 2) further moderation in the prepaid segment’s service revenue decline due to a more favourable mix of internet versus non-internet subscribers.

• YoY. 9MFY19’s service revenue and EBITDA declined 3.3% and 4.1% to RM4,208mn and RM2,200mn – in line with management’s previous guidance for both service revenue and EBITDA to decline by low-single digit. This was due to the prepaid segment’s continued weakness on the back of the factors aforementioned, which more than offset the postpaid segment’s growth. Notwithstanding, the group’s cost discipline kept EBITDA margins resilient at 47.6% (+0.4pp).

• QoQ. 3QFY19’s core net profit contracted 12.6% to RM362mn mainly due to non-recurring cost and higher taxes. However, service revenue improved marginally 0.8% to RM1,413mn (2QFY19: +0.6%) driven by postpaid service revenue, which grew 2.8% to RM666mn (2QFY19: +4.0%) alongside subscriber net adds of 67k (2QFY19: +71k), supported by attractive device ownership programme, plan upgrades, and on-going prepaid to postpaid migration. Whereas prepaid service revenue declined 1.5% to RM740mn (2QFY19: -2.3%) on subscriber net churns of 101k (2QFY19: +42k).

• In terms of ARPU, postpaid ARPU at RM71/month was relatively stable both on a QoQ and YoY basis while prepaid ARPU at RM29/month was unchanged QoQ but lower 6.5% YoY due to heightened data competition.

• Meanwhile, CAPEX as a percentage of service revenue moderated from 15.3% in 1HFY19 to 13.0% in 9MFY19 as recall that investments were frontloaded in the earlier part of the year to upgrade the group’s network quality. Also note that due to the decline in the group’s revenue, management had revised its guidance for CAPEX as a percentage of service revenue higher marginally from 11-12% to 12-13%.

Impact

• We maintain our earnings estimates.

Outlook

• For FY19, management maintained its guidance for service revenue to decline by low-single digit but that for EBITDA to decline by low-to-mid single digit (previously low-single digit). Nevertheless, the latest guidance remains in line with our forecast for FY19 service revenue and EBITDA to decline by 2.8% and 2.0% respectively premised on our expectations for challenges from its prepaid segment to weigh on efforts to drive growth from the postpaid segment.

• In the meantime, management reiterated that focus will be placed on capturing growth from existing customers (e.g., via the promotion of plan upgrades, prepaid to postpaid migration, internet adoption and usage), SME/B2B’s, continuously enhancing customers network experience, as well as cost optimisation initiatives.

Valuation & Recommendation

• In all, we value Digi at an unchanged TP of RM4.25/share based on a WACC of 7.5% and long-term growth rate of 1.0%.

• We reiterate our Sell recommendation on grounds that the stock is fairly valued at current levels, trading at an EV/EBITDA of 13.7x against CY20 which is in line with the stock’s 5-year mean of 13.8x.

• Besides, we also opine that Digi’s FY19/FY20/FY21 forward dividend yields of 4.0%/4.2%/4.3% are not attractive enough to warrant an entry considering the downside risk of continued challenges from its prepaid segment.

Source: TA Research - 21 Oct 2019