KUALA LUMPUR: CIMB Equities Research has upgraded Digi.com Bhd

 to Add with an unchanged discounted cashflow based target price of RM5.10.

It said on Monday Digi’s share price has fallen 11% since end-2017 and it is now trading at a 14% discount (-1.4 standard deviation) to its five-year enterprise value/operating free cashflow (EV/OpFCF) mean.

“We see modestly improving EBITDA (earnings before interest, tax, depreciation and amortisation) in FY18-20F (FY15-17: decline) and decent 4.2%-4.8% yield.

“Potential re-rating catalyst is the delivery of FY18-19 earnings that beat consensus forecasts. Key downside risks are deterioration in market competition and not winning the 700MHz spectrum,” it said.

CIMB Research said despite seasonally lower service revenue, 1Q18 EBITDA (pre-MFRS 15) rose by 1.3% on-quarter (+4.3% on-year) on lower opex. However, core EPS fell 5.8% on-quarter (-5.7% on-year) due to higher depreciation (progressive capex investment) and effective tax rate.

EBITDA/core net profit was broadly in line, coming in at 25%/23% of CIMB Research’s FY18 forecast (consensus: 26%/24%).

Digi declared a DPS of 4.9 sen for 1Q18 (1Q17: 4.7 sen), implying 99% payout on its reported EPS of 5.0 sen (post-MFRS 15).

The 1Q18 service revenue eased 2.0% on-quarter, but rose 0.7% on-year for the first time since 2Q15, in line with our FY18F growth forecast of 1.1%.

Prepaid revenue fell by 4.5% on-quarter (-6.4% on-year) due to weaker seasonality, pre-to-postpaid migration and decline in legacy revenue.

Subs fell further on-quarter, albeit more moderately (-80,000), while average revenue per user (ARPU) eased 6% on-quarter.

Postpaid revenue growth stayed robust (+1.9% on-quarter, +13.7% on-year) on healthy net adds (+91k), though partly offset by lower ARPU (-1% on-quarter).

Digi’s 1Q18 EBITDA margin rose 1.9% pts on-quarter (+1.2% on-year) to 46.3%, mainly due to lower: a) device, b) traffic (mobile termination rates reduced since Jan 1, 2018), c) operations and maintenance (O&M) (operational efficiency initiatives and optimisation of site rental expenses) and d) sales and marketing costs.

These helped buffer against higher staff and other costs on-quarter.

Digi’s 4G coverage in 1Q18 inched up to 88% on-quarter (4Q17: 87%), while its 4.5G coverage was extended by 2% pts on-quarter to 57%, supported by 8,200km of fibre optic cables (4Q17: 8,000km).

The 1Q18 capex was lower by 8.1% on-year at RM181m (capex/sales: 11.3%). The balance sheet stayed healthy with 0.8x net debt/EBITDA in 1Q18 (4Q17: 0.7x).

“We cut FY18-20F core EPS by 2-3% to factor in higher depreciation post-1Q18. After a 5.0% on-year fall in FY17, we see service revenue growing 1.1%/2.5%/1.8% on-year in FY18/19/ 20F, led by postpaid expansion and better data monetisation on steadier competition.

“Coupled with improving margin, we expect EBITDA to grow 2.6%/5.5%/4.0% on-year.

“Core EPS should fall 0.9% in FY18F due to higher depreciation, then grow 7.9%/5.9% in FY19F/20F. Our forecast is on a pre-MFRS 15 basis, in line with Digi’s FY18 guidance,” said CIMB Research. – thestaronline

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