Friday 29 Mar 2024
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This article first appeared in The Edge Financial Daily on January 28, 2019

DiGi.Com Bhd
(Jan 25, RM4.55)
Maintain hold with an unchanged fair value of RM4.55:
We have fine-tuned DiGi.Com Bhd’s (DiGi) financial year 2019 (FY19) to FY20 earnings forecasts as its FY18 net profit of RM1,541 million came in within our and consensus expectations.

We note that our FY19 forecasts are in line with management’s newly revealed expectations, which project a flat service revenue and low single-digit earnings before interest, taxes, depreciation, and amortisation (Ebitda) growth.

Given the struggle against top-line growth, DiGi’s expected Ebitda expansion largely stems from its cost reduction measures. This is supported by the group’s FY18 digitalisation initiatives which have substantively impacted its traffic cost (-17% year-on-year [y-o-y]), sales and marketing (-13% y-o-y), and operation and maintenance (-11% y-o-y).

The capital expenditure guidance of 11% to 12% to revenue for this year is well within our assumptions. However, we note that amortisation cost could remain on the uptrend from additional fees for the 700mw spectrum, which costs RM21.6 million/MHz for the price component and RM1.9 million/MHz for the annual fee.

DiGi declared a fourth interim dividend of 4.8 sen, bringing its FY18 dividend per share to 19.6 sen (+0.8 sen y-o-y), which is in line with our forecast.

DiGi’s fourth quarter of FY18 (4QFY18) revenue rose 5% quarter-on-quarter (q-o-q) from a 46% surge in sales of devices under the Phone Freedom 365 ownership programme. However, the group’s 4QFY18 service revenue was flattish q-o-q at RM1.437 billion as the 411,000 decline in prepaid subscribers was mostly offset by an addition of 325,000 post-paid users amid a flat blended average revenue per user of RM41 per month.

The intentional shift from prepaid subscribers has caused the post-paid share of group revenue to rise to 43% from 38% for 4QFY17.

Meanwhile, the higher sale of devices led to DiGi’s 4QFY18 Ebitda margin dropping by 2.7 percentage points q-o-q to 44.2%. Together with a 1.3 percentage-point increase in the effective tax rate to 27%, Digi’s 4QFY18 net profit slid 4% q-o-q to RM378 million.

The reduction in mobile termination rates by 33% y-o-y beginning this year and halving in 2020 are not expected to have any significant impact on group margins as net calls could be minimal while voice traffic has been on a downward trajectory.

The group reaffirmed that the launch of its home fibre packages (RM95 per month for 50Mbps and RM129 per month for 100Mbps) involving a fibre network to 1,100 households in Jasin, Melaka is exploratory as this juncture.

The stock currently trades at a low FY18 forecast enterprise value/Ebitda of 12 times below its two-year average of 13 times. This stems from the highly competitive landscape as subscriber growth and average revenue per user remain under pressure. — AmInvestment Bank, Jan 24

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