KUALA LUMPUR: Affin Hwang Capital Research has trimmed Digi.Com Bhd’s earnings per share (EPS) by 5-6% for 2017-2019E following its latest quarterly results that came in slightly below expectations.
The research house said Digi’s 1Q17 core net profit of RM373mil was 6.5% lower year-on-year (yoy). Although its earnings before interest, tax, depreciation and amortisation (Ebitda) margin improved 2.5 percentage points yoy to 45.1%, this was insufficient to mitigate the impact of the 4.8% year-on-year decline in revenue.
The weaker revenue was attributed to a sharp 13% yoy decline in the prepaid segment (1Q17 postpaid revenues were up an impressive 12% yoy although accounting for only 35% of mobile revenue).
“We believe that this could be due to more intense competition in the prepaid segment coupled with a shrinking migrant worker segment, where Digi has a strong foothold. Collectively, Digi saw a contraction in its prepaid sub base (-613,000 churn in 1Q17) and a corresponding decline in its prepaid ARPU (RM32 from RM35 a year ago),” Affin said.
Affin said Digi’s management also guided that the decline in prepaid revenues was a strategic decision made to move away from the competitive IDD segment.
“On a positive note, 1Q17 Ebitda margin was firmer yoy due to lower traffic charges and opex although the latter, in our view, may be difficult for further optimisation ahead.
“Sequentially, 1Q17 core net profit was flattish only because of the 4.3 percentage points decline in the effective tax rate. At the pretax level, 1Q17 profit slipped 6.2% quarter-on-quarter due to the abovementioned reasons. For the quarter, a DPS of 4.7sen (98% payout) was announced,” it said.
Based on the first quarter results, Maxis has outperformed Digi in the prepaid segment. Maxis reported a stable prepaid revenue of RM1,005mil for the first quarter of 2017 versus RM1,008mil reported in first quarter of 2016.
Maxis also has overtaken Digi as the operator with the highest number of subscribers. As of 1Q17, Maxis has 11.808 million subscribers while Digi has 11.776 million on the same market definition. Celcom has yet to report its first quarter results. It has 10.556 million subscribers as at 4Q16.
Affin said Digi’s 1Q17 profit accounted for 22% and 23% of the house and consensus 2017E estimates, thus “slightly below expectations”. It added that the major negative surprise was from the sharp erosion in the prepaid segment.
“We have reviewed our prepaid assumptions and cut our 2017-2019E EPS estimates by 4.5%-6.4%,” it said.
“Unless there is a strong pick-up in the subsequent quarters, we think that there could be some downside risks to management’s 2017 guidance for service revenue and Ebitda to sustain at 2016 levels.
“Post our earnings cuts, our DCF-derived 12-month target price is lowered to RM4.88 (previously RM5.01). Maintain hold,” Affin said, adding that key downside risk included irrational competition while upside risk included a higher-than-expected dividend payout.
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