Digi.Com shares fall after downbeat Q2

PETALING JAYA: Shares of Digi.Com Bhd came under selling pressure after several research houses cut their target price for the mobile telecommunications company in view of its lacklustre earnings performance for the second quarter ended June 30, 2017.

The counter fell 17 sen, or 3.47%, to close at RM4.73 yesterday.

The company on Wednesday reported a 14.7% decline in net profit for the second quarter of this year to RM358.9mil, which came in below market expectations, due mainly to progressively higher depreciation and additional finance cost from its sukuk issuance, as well as a weaker contribution from the prepaid segment.

In commenting on Digi’s performance, MIDF Research noted that the overall subscriber base, average revenue per user and service revenue were undermined by the contraction in the prepaid segment in view of the heightened competition among its peers.

“We observed that there is a strategic shift in the service revenue mix, which will further enable digital opportunities. This has led to a continuous positive traction from the postpaid segment,” MIDF Research wrote in its report.

“We expect this positive trend to pick up pace in the second half of the year due to the anticipated deployment of 900Mhz, which will create a more balanced playing field with its peers,” it added.

However, the brokerage said it would expect to see further earnings dilution from the prepaid segment, as Webe is expected to roll out its prepaid plans in the third quarter of 2017.

MIDF Research has cut its target price for Digi to RM5.02 from RM5.42 previously, with an unchanged “neutral” stance.

Similarly, AffinHwang Capital has cut its target price for Digi to RM4.74 from RM4.88 previously, with an unchanged “hold” rating.

Taking the cue from Digi’s management, which had lowered its service revenue guidance to a low mid-single digit decline (from flat), AffinHwang Capital has lowered its revenue assumption for the telco and cut its earnings forecast for the company for 20172019 by 8.6%, 9.9% and 11.4%, respectively.

AffinHwang Capital said while the earnings revision resulted in it lowering the target price for Digi, it has maintained its “hold” rating on the company, as its dividends were still the most appealing within the sector.

According to AllianceDBS Research, Digi’s attractive dividend yields was one of the reasons that put the company in a favourable position among investors.

“We believe investors currently favour Digi over the other mobile players due to its relatively higher dividend yield of 4%, which is sustainable by its strong balance sheet; and its potential to emerge as a winner in the upcoming spectrum allocation exercise, given its strong funding capability,” AllianceDBS Research said.

However, the brokerage noted that the valuations for Digi appeared lofty at 25.4 times estimated 2018 earnings and 13.7 times estimated 2018 enterprise value over its earnings before interest, taxes, depreciation and amortisation. “Due to ample domestic liquidity, the valuation of Malaysian telcos has always been rich and at a premium to regional peers. However, we believe the premium valuation is not sustainable and likely to de-rate as earnings and dividends fall. Although Digi has the strongest balance sheet among its peers, we feel this is a bit meaningless, as the company is constrained by the lack of retained earnings when it comes to dividend distribution,” AllianceDBS Research explained.

The brokerage has cut its target price for Digi to RM4.20 from RM4.30 previously, while maintaining a “fully valued” rating on the counter.

Meanwhile, CIMB Research, which had cut its target price for Digi to RM5 from RM5.20 previously, while maintaining a “hold” call on the counter, said it expects the telco’s earnings to remain under pressure due to intense competition in the prepaid segment.

CIMB Research has cut its earnings forecast for Digi by 8.6% to 12% for 2017 to 2019 to factor in lower prepaid revenue.

“We expect subdued earnings in the near term, given the intense prepaid competition,” the brokerage explained. However, it said Digi could be a beneficiary as the market heads closer to network parity.