Investment Highlights

• We maintain our HOLD rating on Digi.Com with an unchanged forecasts and DCF-based fair value of RM4.80/share based on a WACC of 6.3% and terminal growth rate of 1%, implying an FY19F EV/EBITDA of 12x — in line with its 2-year average.

• We attended Digi's third Sustainability Day yesterday with the theme "Sustainability by Design: Practical steps for Malaysian Businesses" which aims to strengthen its brand and customer loyalty, with a strong focus towards the emerging affluent youth.

• The speakers emphasised the increasing importance of millennials' awareness and appreciation of environmental, ethical and integrity issues which shape their spending patterns, employment preferences and digital experiences.

• The need for business sustainability to be anchored in the changing cultural youth dynamics and expectations resonates in the conference. This is further reinforced by increasing corporate liability implications under the new Malaysian Anti-Corruption Commission (Amendment) Bill 2018 arising from employees' illegal actions.

• The conference speakers advocate a continuing policy toward inculcating a business which can adapt and deliver changes in mindset and cultural and environmental priorities.

• Digi, through its Yellow Heart initiative, seeks to distinguish itself from its peers, supported by a supply chain sustainability policy for its vendors and contractors. The group has developed a real-time Permit-to-Work app which monitors supplier approval, risk and conduct with an aim to reach 60% autopilot processes. This is supported by existing apps such as mobile sales agent MyDigi and myDigialSME to provide immediate information and response to its customers.

• We view these strategies towards penetrating a larger market share in the youth segment as part of Digi’s wider efforts to expand its revenue base. On a QoQ comparison, Digi’s 2Q2019 subscribers rose 113K from gains in both prepaid and postpaid segments, leading to a pause in the consecutive prepaid declines since 3Q2018.

• However, the group’s priorities in driving prepaid to postpaid conversions resulted in the higher value postpaid subscribers increasing by 71K vs. prepaid’s 42K in 2Q2019. The shift from prepaid subscribers has caused postpaid’s share of group revenue to rise to 46% from 41% in 2QFY18.

• The stock currently trades at an undemanding FY20F EV/EBITDA of 12x – at parity to its 2-year average with decent dividend yields of 4%.

Source: AmInvest Research - 18 Sept 2019