This article first appeared in Capital, The Edge Malaysia Weekly on February 7, 2022 - February 13, 2022

Target price: RM4.50 BUY

TA SECURITIES (Jan 31): Digi reported a FY21 core net profit of RM1.105 billion (-6% y-o-y), which came in within our and consensus estimates at 97% and 95% respectively. Digi also declared a fourth interim dividend of 3.9 sen per share (4QFY20: 3.6 sen), which brought FY21’s dividend to 14.9 sen (FY20: 15.6 sen). FY21’s dividend payout ratio of 99.7% (FY20: 99.4%) is consistent with previous years and in line with its dividend policy of distributing at least 80% of net profit.

Our FY22/FY23 earnings estimates have been revised downwards by 2%/2.8% upon imputing FY21 figures into our model. We have also introduced our FY24 earnings estimates of RM1.406 billion. For FY22, its management’s guidance is for: (i) service revenue to return to growth, driven by momentum from the postpaid, business-to-business (B2B) and fibre segments; (ii) Ebitda to be around the level of FY21, driven by ongoing operational efficiency, and (iii) capital expenditure to be around FY21 level (FY21’s capex to revenue ratio: 12.8%) with a focus on enhancing network and digital capabilities.

Digi’s focus on the postpaid, fibre, and B2B segments will be supported by its stronger quality subscriber base with growing Malaysian subscribers and reduced reliance on low-quality, high-churn segments. As for the prepaid segment, management anticipates continued weakness, albeit it is expected to flatten out in FY22 and be offset by the postpaid segment’s growth. Meanwhile, we also foresee upside to mobile service revenue alongside the easing of international travel restrictions.

On the proposed Celcom-Digi merger, there are no changes from previous guidance. The proposal remains subject to the receipt of regulatory and shareholder approvals and other customary terms and conditions, with target completion by 2Q22.

Overall, we maintain our target price for Digi at RM4.50, based on a weighted average cost of capital of 8% and long-term growth rate of 1%. While Covid-19 headwinds prevail, we remain positive on Digi’s ability to sustain service revenue resilience, underpinned by its efforts to drive quality subscriber acquisition. We maintain our “buy” call. Key risks include a prolonged Covid-19 pandemic, heightened price competition and regulatory changes.

Target price: RM1.87 NEUTRAL

MIDF RESEARCH (Jan 31): On Jan 28, Affin Hwang Investment Bank Bhd announced that it will be divesting its entire 63% stake in Affin Hwang Asset Management Bhd (AHAM). The group has entered into a conditional share sales and purchase agreement with Starlight Asset Sdn Bhd, a special purpose vehicle for CVC Capital Partners.

The divestment is for a consideration of RM1.417 billion to CVC. The group calculates the gain on divestment at RM1.037 billion, which will be received within 24 months (non-taxable). The sale was done at a favourable valuation range of 19.7 times PER.

Apart from the loss of a sizeable chunk of reliable income, we have two other concerns: (i) The loss of pre-existing synergies and cross-selling arrangements between the group and AHAM; and (ii) Affin Bank’s ability to successfully execute a more profitable strategy concerning the reinvestment of funds.

Despite the apparent risks, we are positive on the divestment’s effects on the group’s balance sheet. In our opinion, the focus on higher-potential enterprise and community loan portfolios are a step in the right direction as the group seeks to remedy its asset quality and lower-than-average return on equity issues.

Target price: RM1.30 MARKET PERFORM

KENANGA RESEARCH (Jan 31): Sunway Reit’s 18MFP21 realised net income (RNI) of RM221.9 million came in above our expectation at 119% but it was below consensus at 88% as its 4QCY21 and 6QFP21 was stronger than we anticipated, on less rental rebates since the economy reopened last August. Its 6QFY21 announced dividend of 2.8 sen per share brings the 18MFP21 dividend to 6.1 sen, which is also above expectation at 118% of our estimate. Note that its FP21 consists of six quarters or 18 months as the group is changing its financial year end to December (from June).

Going forward, we expect the reopening of the economy to continue as long as the nation’s vaccination rates are kept up and standard operating procedures are adhered to. As such we would expect improved shopper traffic, and better hotel occupancy rates. That said, we do not discount the possibility of further rental rebates in the coming months. The office and services segments are also expected to remain stable.

We maintain our “market perform” call, but on a slightly lower target price of RM1.30, from RM1.35. Risks to our call include bond yield compression and expansion, as well as stronger- or weaker-than-expected earnings in the retail, hospitality and office divisions.

Target price: RM12.42 OUTPERFORM

PUBLIC INVEST RESEARCH (Jan 31): Tenaga announced that the government of Malaysia has approved and decided via a letter from Suruhanjaya Tenaga (ST) to implement the Regulatory Period 3 (RP3) under the Incentive Based Regulation framework (IBR) for the period of February 2022 to December 2024. The decision was a surprise as ST has just decided to extend its RP2 for the second time with all parameters of IBR unchanged effective Jan 1, 2022, until “further notice” — just a few weeks ago.

To recap, ST’s RP2, which expired in 2020, had already been extended for one year until end-2021 and was supposed to be replaced by RP3 by end-2021. That said, the ST has still not disclosed some of the RP3 parameters. For now, we understand that the government is keeping the current base electricity tariff for all electricity users in Peninsular Malaysia throughout the RP3 but with an electricity tariff surcharge of 3.7 sen per kilowatt hour (kWh) for non-domestic users. We maintain our “outperform” call on Tenaga for now pending more details, with a target price of RM12.42, unchanged.

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