Digi.Com Bhd
(July 14, RM5.55)
Maintain hold with an unchanged target price (TP) of RM5.61: Net income for the second quarter ended June of financial year 2015 (2QFY15) was within expectation despite falling 7% year-on-year (y-o-y) and 3% quarter-on-quarter (q-o-q) to RM464 million due to higher depreciation and higher international direct dialing (IDD) traffic cost following the weaker ringgit. 

Quarterly revenue declined 1.3% y-o-y and 3.8% q-o-q to RM1.72 billion due to lower revenue from device and others amid flat service revenue from postpaid and prepaid.  Overall revenue was lower due to a higher mix of affordable smartphone bundles sold compared to higher priced iPhone packages sold in the previous two quarters. As a result, device and other revenue declined 24.7% and 34% q-o-q to RM134 million despite a higher number of devices sold — 281,000 versus 180,000 in 1Q. 

Postpaid revenue increased 3.2% q-o-q to RM448 million to compensate for the 1.1% q-o-q decline in prepaid revenue to RM1.14 billion. First half (1H) revenue of RM3.51 billion achieved 48% of our full year forecast and six months net profit of RM943 million make up 46% of FY15 estimates. 

In 2Q, DiGi.com Bhd subscribers reached 11.8 million, its highest ever after adding 111,000 prepaid subsribers to 10 million (versus 9.9 million in 1Q) while postpaid subscribers added 13,000 to 1.77 million versus 1.76 million in 1Q. 

Amid the competitive environment, DiGi.Com’s blended average revenue per user (Arpu) for 2Q was slightly lower at RM45 (versus RM46 in 1Q) with postpaid Arpu of RM82 (versus RM81 in 1Q) and prepaid Arpu falling to its lowest at RM38 (versus RM39 in 1Q). 

DiGi.Com declared its second interim dividend of six sen per share, marking a consistent 99% payout ratio. 

We expect a full year dividend of 26 sen, translating into an attractive yield of 4.7%.

Operating cash flow for 2Q stood at RM588 million (versus RM582 million in 1Q) as capital expenditure increased to RM200 million (versus RM193 million in 1Q). Cash reserves dropped to RM303 million (versus RM357 million in 1Q) while interest-bearing debt rose to RM1.25 billion from RM1.05 billion in 1Q. Net debt-to-earnings before interest, taxes, depreciation and amortization  remains low at 0.3 times. 

Following the expected performance, we are maintaining our earnings per share forecasts for FY15 and FY16. Despite the slower 1HFY15, we expect earnings to pick up in 2H on Hari Raya festivities and a seasonally stronger fourth quarter. 

The industry’s competition has heightened following the recent postpaid price war sparked by Celcom. DiGi.Com has less exposure to the postpaid market and could be less affected with 1.8 million subscribers (versus Maxis’ 2.8 million and Celcom’s 2.7 million) and Arpu of RM82 (versus Maxis’ RM96 and Celcom’s RM90). Our recommendation is kept at “hold” with an unchanged TP based on dividend discount model. — JF Apex Securities, July 14

This article first appeared in The Edge Financial Daily, on July 15, 2015.