Investment Highlights

• We retain our HOLD rating on Digi.Com with an unchanged DCF-based fair value of RM4.55/share. This is based on a WACC of 6.3% and terminal growth rate of 2%, which implies an FY20F EV/EBITDA of 12x — in line with its 2-year average together with a supportive dividend yield of 4%.

• Digi recently launched a new Internet Chili Padi prepaid plan offering 3GB and unlimited social media (Facebook, Instagram and Twitter) at only RM15 for 30 days. Other charges apply at 10 sen/minute for voice calls to all networks, RM0.10/SMS and 30 sen/minute for video calls.

• This new package could potentially exacerbate the celco sector already fierce price war given that the price point is half of Digi’s 1QFY20 average revenue per user of RM30/month.

• Recall that the intense competition of rival U-Mobile and mobile virtual network operators had led Maxis to become the first of the 3 largest incumbent operators to launch a prepaid package with unlimited data priced at RM35/month at speed capped at 3Mbps last week. Celcom followed accordingly within a week.

• Despite these unlimited data plans, both Maxis and Celcom aim to maintain their prepaid ARPU above RM30/month vs. the celco sector’s RM31/month.

• Even U Mobile’s most affordable prepaid plan with unlimited data is priced at RM30/month with speed caps at 6Mbps and 6GB of hotspot quota.

• With these substantively lower prices, we may be at the cusp of another all-out war as prepaid subscribers gravitate towards the least expensive monthly outlays under the current Covid- 19-dampened economic outlook and diminished consumer spending power.

• In 1QFY20, Digi’s net subscribers slumped YoY by 250K mainly from the prepaid segment losing 500K subscribers which was partly offset by gains in postpaid users.

• While prepaid average revenue per user (ARPU) was stable QoQ at RM30/month, blended ARPU slid RM1/month to RM40/month due to a RM3/month decline in postpaid to RM69/month. This stemmed from lower pricing entry from prepaid migration and decreasing non-revenue generating subscribers.

• Hence, we view Digi’s new marketing strategy as management’s desperate efforts to retain its leading position in the prepaid segment, which accounts for a market share of 39% amongst the top 3 operators. For now, we retain our forecasts pending further clarity on the reaction of other cellular operators over the next few months.

• The stock currently trades at a fair FY21F EV/EBITDA of 11x – slightly below its 2-year average of 12x with decent dividend yields of 4%.

Source: AmInvest Research - 24 Jun 2020