Investment Highlights

• We maintain our HOLD rating on Digi.Com with unchanged forecasts and a DCF-based fair value of RM4.70/share based on WACC of 6.3% and terminal growth rate of 1%, which implies an FY19F EV/EBITDA of 12x — in line with its 2-year average.

• We attended Digi's Analyst Day last Friday. The group reiterated its strategy to deliver sustainable revenue growth while maintaining cost efficiencies benefiting from its largest shareholder Telenor’s deployment and procurement policies.

• Management affirmed that the sharing of telco infrastructure amongst industry players is necessary to secure cost efficiencies amid a highly competitive landscape which emphasises the capability to rapidly launch new products. This is demonstrated by operators launching fibre broadband services soon after the government proceeded with the Mandatory Standard Access Pricing regime.

• Meanwhile, sentiment in the sector has been ambivalent since the Malaysian Communications and Multimedia Commission’s announcement of the National Fiberisation and Connectivity Plan, which is estimated to cost RM22bil, of which up to half could be borne by the industry operators. However, management indicated that this will already include Digi’s existing capex programme, currently targeted at 12%–13% of FY19F service revenue.

• Contrary to the past trend of rising capex, Digi CFO Inger Gloeersen Folkeson indicated that future spending may be trending downwards as operators opt to share resources and further reduce operating costs through IT innovations such as digital and cloud-based solutions.

• In the past, Digi has moved away from its migrant and affordable segment focus towards value-added services by promoting internet, digital solutions, and youth-centric postpaid products to develop a more sustainable revenue mix. However, the group’s prepaid segment, which contribute over half of its FY19F revenue, will remain a key marketing element.

• Notwithstanding the abortive merger with Axiata, management views that consolidation remains on the table given the sectoral and global competitive landscape. While the group’s nichecentric digital solutions are still far from monetisation, management is positioning its Fibre to the Home (FTTH) strategy to provide continuous connectivity, together with 7,000 nationwide Wi-Fi sites. So far, FTTH bundled with mobile plans have been launched in selected Klang Valley areas as well as Jasin in Melaka and Sabah.

• In 3QFY19, Digi’s revenue was flattish QoQ despite an overall net decline of 34K subscribers due to Digi’s priorities in driving prepaid to higher value postpaid conversions. ThIs shift from prepaid subscribers has boosted postpaid’s share of group revenue to 47% in 3QFY19 from 40% in 9MFY18.

• 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 - 29 Oct 2019