This article first appeared in The Edge Financial Daily on January 24, 2020

DiGi.Com Bhd
(Jan 23, RM4.49)
Maintain neutral with a higher target price (TP) of RM4.75: DiGi.Com Bhd reported a 9.2% decline in fourth quarter of financial year 2019 (4QFY19) net profit to RM342.9 million. Stripping out non-operating items in relation to its information technology transition cost amounting to RM8.6 million, DiGi’s 4QFY19 core profit dropped by 7% year-on-year (y-o-y). Its full-year core profit fell by 6.5% y-o-y to RM1.4 billion, accounting for 97% and 99% of consensus and our forecasts respectively. Although FY19 revenue was flat, the drop in core earnings was mainly due to the adoption of Malaysian Financial Reporting Standard 16, which has inflated depreciation and interest costs. We adjust down our FY20-21F earnings forecasts by 5% as we impute a higher depreciation cost assumption. As a result, our discount cash flow-based TP increases slightly from RM4.72 to RM4.75. A fourth interim dividend of 4.4 sen per share was declared (4QFY18: 4.8 sen).

DiGi’s 4QFY19 revenue was flat as the decline in prepaid revenue was offset by higher post-paid revenue and device sales. Prepaid subscriber base fell by 6.8% y-o-y to 8.2 million while post-paid customer base improved by 8.1% y-o-y to three million. In terms of average revenue per user (Arpu), prepaid was unchanged at RM30, though post-paid improved marginally by 1.4% to RM72. Device sales increased slightly by less than 2% to RM241 million. Sequentially, total subscriber base continued to fall while blended Arpu improved marginally.

DiGi has recently announced its participation in several fifth-generation (5G) initiatives in Langkawi, Kedah involving the testing of 5G network sharing with Telekom Malaysia Bhd, partnership with a hospital to pilot the first 5G connected ambulance as well as the offering of Malaysia’s first real-time virtual tourism experience at the Langkawi International Airport. All these are part of the aspiration in making Malaysia the first country to spearhead 5G implementation in Asean. Although the government is targeting 5G commercialisation by the third quarter of this year, we believe the potential impact would be higher capital expenditure but minimal earnings accretion due to slow take-up rate from small and medium-sized enterprises and government entities in the early years of implementation. — PublicInvest Research, Jan 23