KUALA LUMPUR (July 18): Analysts covering mobile telecommunications network provider Digi.Com Bhd showed mixed reactions for the latter’s target price (TP) forecast and its prospects ahead.
This comes after Digi last Friday (July 15) saw its net profit drop 21.39% to RM220.04 million, from RM279.91 million a year earlier, while its revenue for the second quarter ended June 30, 2022 (2QFY22) fell 4.92% to RM1.54 billion from RM1.62 billion.
Digi blamed the drop in profit on the one-off prosperity tax and increased net finance costs as a result of non-cash hedge accounting, while the fall in revenue was attributed to a steady growth in the postpaid, business-to-business and fibre segments from quality acquisitions, and attractive bundles were unable to offset weaker prepaid in 2021.
Kenanga Research analyst Ahmad Ramzani Ramli, who upgraded his TP to RM4.25 (from RM3.70), reiterated an "outperform" call to reflect the firm’s valuation of Celcom Axiata Bhd-Digi post the merger, and said Digi’s first-half (1HFY22) results came broadly in line with the firm’s forecast but missed the consensus estimate.
“Its subscribers, in both the prepaid and postpaid segments, continued to grow, while blended average revenue per user remained stable.
“The company reiterated its guidance for a rebound in service revenue in FY22, but expects a slight dent to its earnings before interest, taxes, depreciation and amortisation (EBITDA) margin on merger cost and inflationary pressures,” he said.
Citing key takeaways from Digi’s results briefing, Ahmad Ramzani, among others, noted that the company remains confident of a rebound in service revenue for the full year despite a slow start in 1HFY22, driven largely by the gradual return of migrant workers who were inclined to subscribe to its prepaid packages.
He added that Digi guided for its EBITDA margin to slip slightly from the current level of 48% going forward due to costs incidental to the merger exercise, as well as higher utility bills, while its tax rate may exceed the guided 33% on deferred taxation and non-deductible expenditure.
Notwithstanding that, Amhad Ramzani said Digi refrained from commenting on its plan with regard to Digital Nasional Bhd (DNB), the special purpose vehicle set up by the government for the implementation of 5G, as well as DNB’s single wholesale network model.
To recap, it was widely reported that six mobile network operators, including Digi, were poised to acquire a 70% stake in DNB recently.
“We take it as negotiations or possibly fine-tuning with the government on pricing and annual outlay commitment are still ongoing.
“The company is confident that the Celcom-Digi merger will be completed in 2HFY22. With the Malaysian Communications and Multimedia Commission having given its green light, the only outstanding approvals are those from Bursa Malaysia and the Securities Commission Malaysia,” he said.
Separately, PublicInvest Research analyst Eltricia Foong, who reduced her TP to RM3.83 from RM4.05 while maintaining a "neutral" call, said Digi’s results were below the firm’s and consensus expectations, accounting for 43% and 41.5% of the full-year estimates respectively.
She highlighted that Digi’s revenue was within the firm’s expectations but net interest as well as tax costs were higher-than-expected.
“As such, we cut our FY22-24 earnings estimates by 7% to 10%, factoring in higher interest and tax costs,” she said.
Looking ahead, Foong said Digi is expected to complete the exercise by year end after receiving regulatory approval for the proposed merger with Celcom.
"Based on our preliminary estimate, Digi could see a slight earnings per share enhancement of about 2% post-merger. Operationally, we do not expect any major impact in the immediate term, with management focusing mainly on the integration phase.
“In the medium term, we believe there are synergies to be reaped in terms of sharing of resources, network optimisation and lower procurement cost, due to better scale in purchases. Based on initial estimates by management, the potential value accretion is around RM8 billion through cost and capex synergies,” she said.
Hong Leong Investment Bank Research Tan J Young, meanwhile, maintained his "hold" call on Digi with a lower discounted cash flow (DCF)-derived TP of RM3.60 (from RM4), after adjusting the weighted average cost of capital from 5.7% to 6.3% and TG of 1%.
“While waiting for further clarity of the merger and 5G structure with DNB, the dividend yield of 4.2% should sustain its share price in the near term,” he said.
RHB Research's Jeffrey Tan, who slashed his new DCF-based TP to RM3.65 (from RM4.10) while maintaining a "neutral" call, said Digi’s stock sentiment is to be capped until the 5G debacle is fully resolved.
“With Digi’s share price down about 22% year-to-date, 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,” he said.