ANALYSTS are cautious on the prospects of Digi.Com Bhd mainly because of intense competition from other telcos, 5G capex investment and lower-than-expected profit margin.
MIDF Research has maintained its neutral rating on Digi at RM4.51 with a lower target price (TP) of RM4.30 from RM4.93.
In a note on Jan 23, the research house said the telecommunication industry is expected to remain competitive. This is partly owing to the substantial changes in the mobile termination rates (MTRs) in accordance with the mandatory standard on access pricing (MSAP).
“Note that the MTRs for 2020 have been halved to 0.99 sen. While both the postpaid and prepaid average revenue per user (ARPU) has been stable as seen in 4Q19, we expect another round of aggressive price war, possibly to be triggered by U-Mobile, in conjunction with the upcoming listing exercise,” it said.
On the other hand, it said voice revenue has been falling at a faster pace than the acceleration in data revenue. Thus, with the difficulty in growing revenue, one of the key focus would be to have effective cost management practices to minimise the contraction in revenue.
“In this regard, Digi’s profit margin has sustained at above the 20% level. This, in turn, would help to provide a healthy dividend payment to the shareholder.
“We expect dividend yield would hover around 4% in the foreseeable term. All factors considered, we are maintaining our neutral recommendation on the stock,” it said.
The company announced a dividend of 4.4 sen per share, bringing the total for FY19 to 18.20 sen, a decline of 7.1% year-on-year (yoy) from 19.6 sen per share in FY18.
However, the research house noted that the dividend was still within its expectation as it constitutes 96.3% of its full-year FY19 dividend estimates of 19.6 sen.
The group’s 4Q19 normalised earnings amounted to RM338.2 mil (-10.6% yoy). The normalised earnings were primarily impacted by a combination of higher depreciation and amortisation (+48.4% yoy) and higher finance cost (+82.4% yoy).
“Meanwhile, 4Q19 revenue remained resilient at RM1,678.1 mil (+0.2% yoy), mainly supported by higher data revenue (+6.1% yoy),” the research house said.
MIDF Amanah noted that Digi’s cumulative FY19 normalised earnings – which came in lower at RM1.42 bil – were still within its and consensus expectations.
However, JF Apex Securities Research has maintained its hold call for Digi with a lower TP of RM4.75 (previously RM5.06).
“Our target price is derived based on discounted cash flow (DCF) valuation with a weighted average cost of capital (WACC) of 6.62% and a long-term growth rate of 2%. Our target price also implies a 25.4x FY20F PE based on EPS of 18 sen,” it said.
JF Apex expects Digi will continue to attain higher revenue from data (postpaid and prepaid) and device sales in coming quarters, underpinned by the Phone Freedom 365 programme.
It said major risks include stiffer market competition from other telcos, 5G capex investment and lower-than-expected profit margin.
“We lowered our earnings forecast for FY20F as 2019 earnings fell slightly below our full-year earnings expectation,” it added.
Digi shares were traded at RM4.51 before the midday break on Jan 23, giving it a market capitalisation of RM35.06 bil. – Jan 23, 2020
