1H16 results came in within expectations, accounting for 47.6%/47.9% of our/consensus full-year core PATAMI estimate. Digi maintains its flattish FY16 guidance despite challenges ahead. Post results review, we marginally revised our FY16/17E earnings by -0.3%/0.1%, after fine-tuning. Maintain MARKET PERFORM with unchanged TP of RM4.84, based on targeted FY17 EV/forward EBITDA of 13.1x (representing an unchanged - 0.5x standard deviation below its 4-year mean).

1H16 core PATAMI of RM820m (-14.3% YoY) came in within expectations, accounting for 47.6%/47.9% of our/consensus full-year estimates. Overall, the 1H16 performance was impacted by the price & data quotas-centric competition (especially the prepaid segment) and weak 1Q16 performance.

It declared a second interim tax exempt dividend of 5.4 sen (ex-date: 29 August), bringing its 1H16 DPS to 10.5 sen (1H15: 12.1 sen). For the full financial year, we expect Digi to declare 22.0 sen, translating into a dividend yield of 4.6%.

YoY, 1H16 revenue declined by 5.9% to RM3.3b, mainly attributed to the lower service revenue (-1.9% as a result of the weaker prepaid segment, no thanks to lesser IDD traffic post rationalisation and also effect from continued migration of prepaid to postpaid plans) coupled with smaller device & other revenue (-43%). Group core PATAMI declined by 14% to RM820m due to higher: (i) OPEX, (ii) D&A expenses (as a result of the rapid network expansion post-modernisation), and (iii) effective tax rate.

QoQ, 2Q16 service revenue leveled at -0.2% as the strong growth momentum on postpaid (+6.0%) was largely offset by the weak prepaid performance (-2.8%, due to lower IDD traffic post rationalisation and continued internal migration from prepaid to postpaid plans). COGS, however, was lower by 16%, thanks to lower volume of smartphones sold while OPEX to service revenue ratio spiked up to 32.7% (vs. 30.9% in 1Q16) due to higher site rental as well as increased network-related costs followed by the rapid expansion plan for its 4G LTE and LTE-A networks. Despite flattish turnover, its EBITDA managed to improve to RM735m (+4.5%) with higher margin of 44.4% (1Q16: 42.6%), driven by higher IDD margins and stronger data monetisation.

Digi’s total subscriber base added 11k net adds in 2Q16 (to 12.3m) as a result of higher postpaid subscribers(52k) but partially offset by weaker prepaid base (-41k) impacted by the higher rotational churns. Active internet subscribers were maintained at c.7.9m or 64.5% of total subscribers. The group's LTE/LTE-A population nationwide coverage has reached 76%/34%, respectively with 3.3m subscribers (or 27% of its total subscriber base).

Digi is maintaining its FY16 guidance where the group is targeting to achieve service revenue and EBITDA levels that are similar to FY15 (at c.RM6.35b and RM2.98b, respectively). Digi, meanwhile, has revised its capex guidance to 13-14% of service revenue (which implied RM820-890m) as compared to the earlier RM900m target followed some tax savings.

No solid updates on the 900/1800MHz spectrum fee which, we believe, will provide a short-term re-rating catalyst to incumbents should the renewal structure results in less financial impact to the incumbents.

Source: Kenanga Research - 12 Jul 2016