1Q22: Below Expectations; Management Expects Celcom-Digi Merger In 2H22
1Q22 core net profit fell 8% yoy to RM248m due to the Cukai Makmur impact, prepaid
weakness, and higher staff costs. Digi expects a return in service revenue growth (after
six consecutive yoy declines) in 2022. Key drivers are postpaid, B2B and fibre.
Management expects the merger to be completed sometime in 2H22. Cut 2022 earnings
forecast by 5% to account for a higher tax rate and potential cost arising from the
merger. Maintain HOLD with a marginally lower target price of RM4.15.
RESULTS
• 1Q22 results below expectations. DiGi.com’s (Digi) 1Q22 core net profit fell 8% yoy and
2% qoq to RM248m due to: a) higher effective tax rate (1Q22: 37%, 4Q21: 16%, 1Q21:
26%) amid the impact of the one-off Cukai Makmur, b) lower prepaid revenue (-4% yoy
and -2% qoq), and c) higher staff cost (+5% yoy, +7% qoq). This was offset by resilient
postpaid revenue (+3% yoy, +1% qoq). 1Q22 core net profit accounts for 22% of our and
consensus’ full-year forecast, below expectations
• Dividend: 96% earnings payout. The group declared its first interim dividend of 2.9
sen/share (96% payout). Our full-year estimates of 14.7 sen (100% payout) will translate to a
3.5% yield.
STOCK IMPACT
• 1Q22 revenue dropped 2% yoy and 4% qoq to RM1,522m, due to seasonally lower
device revenue (flat yoy, -19% qoq), prepaid weakness (-4% yoy, -2% qoq), and lower digital
revenue (-25% yoy, -10% qoq). This was partly offset by improvement in postpaid revenue.
• Postpaid service revenue grew 3% yoy (flat qoq) to RM633m (the sixth consecutive
service revenue growth), driven by higher subscriber growth with 42,000 net adds qoq,
customer stickiness and continuous pre-to-post migration. ARPU, however, was lower at
RM61/month (4Q21: RM63/month, 1Q21: RM65/month) due to entry-level dilution.
• Prepaid revenue dropped 4% yoy and 2% qoq to RM615m due to subscriber loss (-
119,000 subscribers qoq) and lower ARPU of RM32/month (4Q21: RM33/month, 1Q21:
RM33/month) on intense competition and Digi’s focus on acquisition of quality subs.
• 4Q21 normalised EBITDA margin grew 1ppt yoy and 2 ppt qoq to 48.9%, on the back
of lower COGS (-6% yoy, -24% qoq) on lower digital and device sales. Opex was flat with
Digi’s modernisation initiatives cushioning its network expansion cost and inflationary
pressure. Together with lower depreciation (-4% yoy, -3% qoq), with the 3G network shut
down in 4Q21, 1Q22 core net profit came in at RM248m.
• Merger slated to be completed within 2H22. The proposed Celcom-Digi merger is
progressing as planned and is on track to be completed by 2H22. With regards to the
Statement of Issues (SOI) raised by the regulator MCMC, Digi is still in the midst of providing
a comprehensive response to the regulator. While there could be potential cost savings of
around RM500m-1b, the group may incur additional cost arising from the merger in 2022.
EARNINGS REVISION/RISK
• We lower our 2022 earnings by 5% to account for higher effective tax rate (Digi guided 33%
for 2022, our previous forecast was 32%), and higher cost arising from the merger.
• 2022 outlook. Digi maintained its target for service revenue to return growth after six
consecutive yoy declines (since 2016). This is expected to be driven by momentum in
postpaid, B2B and fibre, which would help offset the weakness in prepaid. Digi also aims to
have EBITDA at around 2021’s level with good cost discipline. For capex, Digi aims to spend
about 13% of total revenue, mainly on the JENDELA initiatives. We understand that all these
guidance have not factored in any impact from the 5G rollout and Celcom-Digi merger.
VALUATION/RECOMMENDATION
• Maintain HOLD with a marginally lowered DCF-based target price of RM4.15 (discount
rate: 7.2%, terminal growth: 2%) in tandem with earnings cut. At our target price, the stock
will trade at 12x 2022F EV/EBITDA (its five-year mean valuation). Our target price reflects
an expected merger synergy of RM500m (from opex and capex savings) from 2H23
onwards.