This article first appeared in The Edge Financial Daily on July 16, 2019

Digi.Com Bhd
(July 15, RM5.05)
Maintain neutral with a target price of RM4.72: Digi.Com Bhd reported a flattish net profit for the second quarter ended June 30, 2019 (2QFY19), improving by 2% year-on-year (y-o-y) to RM392.5 million, as lower revenue was offset by lower cost and effective tax rate.

Cost of goods sold fell 15% due to a drop in traffic cost from a reduction in regulated interconnect rate and lower device bundles.

Additionally, the adoption of Malaysian Financial Reporting Standard 16 has resulted in lower operating expense but this was offset by higher depreciation and finance cost.

The first half ended June 30, 2019 (1HFY19) results were in line with expectations, accounting for 48% and 50% of consensus and our full-year estimates respectively. A second interim dividend of five sen per share was declared (2QFY18: 4.9 sen).

The decline in revenue was mainly due to a 13% decline in the prepaid segment on the back of intense data competition and active postpaid conversions.

The company’s prepaid segment posted lower revenue due to a 6.3% drop in subscriber base while average revenue per user shed RM3 to RM29.

Despite a steady Internet usage growth, intense data competition and active migration to postpaid have trimmed service revenue growth.

Meanwhile, the company’s postpaid revenue improved by 10% y-o-y on higher subscriber base, which increased by 10%.

The postpaid growth was also supported by plan upgrades by existing customers. Note that the split between prepaid and postpaid revenue stood at 54:46, compared to 60:40 in 2QFY18.

Our earnings forecasts remain unchanged

Telenor’s proposed merger of its Asian operations (which includes Digi) with Axiata Group Bhd has yet to receive approval from the Malaysian regulator.

Nevertheless, we believe the proposed merger is likely to go through in view of the sizeable cost synergies to be created as well as technology transfer, which should eventually benefit Malaysian consumers. — PublicInvest Research, July 15