This article first appeared in The Edge Financial Daily on April 17, 2018 - April 23, 2018

DiGi.Com Bhd
(April 16, RM4.54)
Upgrade to buy with an unchanged target price (TP) of RM5: Results are broadly within market and our expectations. DiGi.Com Bhd’s first-quarter of financial year 2018 (1QFY18) net profit grew by 3.5% year-on-year (y-o-y) to RM386 million, driven by adoption of Malaysian Financial Reporting Standard (MFRS) 15, higher service revenue (+1.6% y-o-y) and lower operating expenditure (-0.8% y-o-y). Of these, the adoption of MFRS 15 (higher upfront recognition of revenue from contracts with customers) gave the largest lift, increasing 1QFY18 profit by RM34 million (around 10%). Overall, the results are within expectations — 1QFY18 net profit accounts for 26% of the street and our full-year profit forecast.

Adjusted for the accounting changes, 1QFY18 earnings before interest, taxes, depreciation and amortisation inched up to RM741 million (+4% y-o-y) but net profit fell by 6% due to higher depreciation/amortisation costs (increase in spectrum cost amortisation) and higher interest expenses.

Operationally, 1QFY18 was a commendable quarter, in view of: i) DiGi reported a 0.7% y-o-y increase in service revenue, driven by higher blended average revenue per user of RM42 (from RM40), which more than offset a minor decline in total subscribers (-19,000 y-o-y); ii) network, sales and marketing costs have declined, aided by improvement in operational efficiencies and lower site rental costs; iii) operating cash flow strengthened by 9% y-o-y to RM560 million; and iv) 1QFY18 dividend inched up to 4.9 sen, versus 4.7 sen in 1QFY17.

We maintain our earnings forecasts and discounted cash flow-derived TP of RM5 but tactically upgraded DiGi to “buy” (from “hold”) following its recent price dip (-6% month-on-month). Rerating catalysts are a likely reinstatement of syariah-compliant status in May 2018 and moderation in domestic telco price competition. Key risks are weaker earnings and higher price competition. — Affin Hwang Capital Research, April 16