KUALA LUMPUR (Oct 18): Hong Leong IB Research has maintained its "buy" rating on DiGi.Com Bhd at RM4.546 with an unchanged target price of RM5.10, and said price regulation is unlikely to be adopted in the mobile sector.

In a note today, the research house said fibre wholesale may be a new income stream.

HLIB Research said DiGi declared a second dividend of 5 sen per share after its 9M18 core net profit (CNP) of RM1.1 billion was in line despite being softer than 9M17's.

It said the softer CNP was due to network operating model transition cost and interest rate swap (IRS) gain in 9M17.

The research house said DiGi's 9M18 revenue of RM4.9 billion is within its expectation — which the revenue translated into a CNP of RM1.1 billion (pre-MFRS 15) — accounting for 77% and 73% of HLIB's and consensus full year forecasts, respectively.

Meanwhile DiGi's quarter-on-quarter (q-o-q) top line declined by 1% mainly due to weaker prepaid voice, which fell 7%, more than sufficient to offset data's 2% expansion. However, HLIB said the bottom line was up to 3% as second-quarter 2018 was impacted by one-off network operating model transition cost which amounted to RM40 million.

Year-on-year, revenue gained 2% thanks to solid postpaid growth and stronger prepaid data monetization, more than sufficient to offset the contractions of voice and messaging revenues.

Nevertheless, DiGi's CNP was lower by 4% as 3Q17 was artificially boosted by fair value gains from IRS.

As for DiGi's year-to-date, the turnover rose 3% due to the same reason above, but the CNP declined by 3% after taking into account the transition cost and IRS gain.

On DiGi's postpaid, HLIB said subscriber (sub) base continued to climb in 3Q18, topping 2.7 million after adding 75,000 q-o-q while average revenue per user (ARPU) was stable at RM76. The postpaid revenue reached another record high at RM640 million, up 3% q-o-q and 15% y-o-y. It accounted for 43% of total service revenue in 3Q18.

For its prepaid, after four consecutive quarters of churn, sub base finally grew after adding 69,000 subs q-o-q, reaching a total of 9.1 million. ARPU contracted by RM1 q-o-q to RM31 amid data pricing aggression.

The prepaid internet revenue continued to experience strong demand, gaining 10% y-o-y to RM399 million, accounting for 48% of prepaid revenue.

HLIB recalled that 2Q18's depreciation and amortisation (D&A) was boosted by depreciation reversal and there was a spillover into 3Q18 which amounted to RM10 million to RM13 million. Going forward, the D&A run rate should normalise back to circa RM205 million level.

HLIB opined that price fixing will be contained within the fixed segment and not likely to spread into the mobile space given the intense rivalry. DiGi's 8,300-kilometre fibre is also subject to mandatory standard on access pricing (MSAP) and may eventually lead to new revenue stream, if materialised.

HLIB maintained its forecast as results were in line.

HLIB said DiGi is still a favourite due to MSAP beneficiary, improved efficiency with access to low frequency band, managed services, strong balance sheet to support spectrum fee and prudent management.

At 11.35am, DiGi shed 0.22% or 1 sen to RM4.45 with 1.56 million shares traded, with a market capitalisation of RM34.6 billion.