Investment Highlights

• We retain our HOLD rating on Digi.Com with unchanged forecasts and DCF-based fair value of RM4.40/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 held an online Technology Conference yesterday with Joachim Rajaram, Chief Corporate Affairs Officer, Kesavan Sivabalan, Chief Technology Officer and Inger Gloersen Folkeson, Chief Financial Officer with the following salient highlights:
  • The group’s technology focus is on providing a consistent network in areas deemed to be important, modernise its operation and organisations for 5G technology and strengthening privacy and cybersecurity. This includes data analytics, optimising spectrum efficiency and robotic process automation for customer service, marketing, finance and administrative functions.
  • Since 2012, Digi has built 9,740km of fibre network in which 80% of sites are connected via fibre or single hop-to-fibre with high capacity microwave technology. However, only 30% of Digi’s broadcasting tower stations (BTS) are fully fiberised. While this is low vs. the Malaysian Communications and Multimedia Commission’s (MCMC) national estimate of 40% for fiberised BTS, Digi said it is comfortable with the current status given the bandwidth growth, speed requirements and data demand.
    Management did not provide clarity on the additional capex needed to fully fiberise its network nor established any target as this depends on the evolution of data traffic, which has remained steady while 4G download speeds improved throughout the recovery movement control order (See Exhibit 15).
    However, Digi has signed a memorandum of understanding with Maxis and Celcom to collaborate on fibre-to-base stations to optimise capex efficiencies. Digi also has a partnership with TM Global for West-East Malaysia submarine cable system and mobile backhaul.
  • Digi aims to leverage its partnerships to provide fixed broadband solutions by leveraging on Time dotCom and TM’s fibre networks to tap into 3.5mil households. Digi aims to market this service by scaling up and extending postpaid bundle offerings for home and on-the-go connectivity.
  • This could be similar to the group’s potential 5G marketing plan to target selected industries, education, government, healthcare and high-density consumer centres. Digi plans to co-develop 5G use cases with industry vertical players and parent Telenor Group by improving its network connectivity by using 5G fixed wireless access with deployment at highly congested sites. Given that lab tests have just been completed with the MCMC, Digi has deferred any new development updates to the regulator.
• Against an increasingly competitive celco landscape, 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 - 27 Aug 2020