This article first appeared in The Edge Financial Daily on July 17, 2018

DiGi.Com Bhd
(July 16, RM4.27)
Upgrade to buy with an unchanged target price of RM4.70: Digi reported second financial quarter ended June 30, 2018( 2QFY18) normalised earnings of RM389 million (+8.3% y-o-y). The improvement in earnings was mainly led by the growth in the post-paid segment and higher device revenue. This led to first half ended June 30, 2018  (1H18) normalised earnings of RM772.4million, an increase of +5.2% y-o-y. All in, Digi’s 1H18 financial performance came in within our and consensus expectations, accounting for 55% and 51.5% of FY18 full-year earnings estimates respectively.

Digi’s 2QFY18 post-paid revenue climbed by +15.5% y-o-y to RM619 million. The improvement in postpaid take-up rate was supported by increased plan upgrades via subscriptions for high value plans enabled with borderless roaming proposition. In addition, there are easy entry plans and affordable 4G device bundles supported by stronger base management, data insights and digitisation capabilities which continued to drive prepaid to post-paid conversions. Average revenue per user (Arpu) remained resilient at RM76 per month, supported by continued prepaid to post-paid conversions. This led to +15.8% y-o-y expansions in post-paid customer base to 2.7 million subscribers.

The prepaid revenue declined at slower pace of -5.7% y-o-y to RM865 million from RM917 million as at 2QFY17. The lower revenue was attributable to -7.5% y-o-y decrease in subscriber base to nine million. There are also continuous conversions from prepaid to post-paid. Meanwhile, Arpu remains stable at RM32 per month.

Digi announced 2QFY18 dividend of 4.6 sen per share. This is 0.3 sen higher as compared with 4.6 sen per share announced in 2QFY17. Cumulatively, 1HFY18 dividend amounted to 9.8 sen per share, up from 9.3 sen per share for 1HFY17.

Digi’s 2QFY18 capex for network deployment came in lower at RM147 million, a reduction of -35.8% y-o-y. This represents capex to service revenue ratio of 10% as compared with 16% as at 2QFY17. The group embarked on network operating model shift to establish a data-centric network centred on customer experience and to deliver optimal network operations. The coverage of the 4G LTE and LTE-A networks has reached 89% and 58% of population respectively, supported by over 8,300km of fiber network nationwide.

We maintain our target price of RM4.70 per share. This is based on dividend discount model (DDM )valuation methodology. Our target price implies a forward financial year ending Dec 31, 2019 (FY19) price earnings (PER )of 24.7 times.

The strategic shift in service revenue mix from prepaid to post-paid has bode well for the group. As at 2QFY18, the ratio of post-paid to prepaid customer has risen to 0.72 from 0.58 a year ago. This was supported by attractive and competitive post-paid Internet proposition introduced by DiGi. The improvement in earnings also led to better dividend payment. At this juncture, we view that Digi has the most attractive dividend yield of more than 4.5% as compared to its peers. In addition, given the share price weakness, the stock is currently trading at an attractive PER of 23 times which is below the two-year historical average of 24 times. This would represent an opportunity for investor to increase exposure in the stock. All factors considered, we are upgrading our recommendation to “buy” from neutral previously. — MIDF Research, July 16