Attractive yields expected to support price. Though Digi‟s stated long-term dividend policy has been to “pay out a minimum 80% of net income”, its actual ordinary payout has been in excess of 100%. The company has also either carried out a capital repayment or offered a special dividend in the past. Our current ordinary dividend yield forecast of 5.6% (inclusive of 6.4sen capital distribution) for FY13 remains the same as last year. The company is in the process of finalizing a capital repayment totaling RM495m or 6.4 per share and is expected to be completed by 1QFY13. This comes just after its first capital management exercise, totaling RM509m, which was distributed in the 1H. Given that the company is still in a net cash position after two rounds of capital repayment, we do not rule out the likelihood of special dividend or further capital repayments in the near-term.

 

Adopting cost saving strategies. The group is embarking on network collaboration with Celcom, which includes sharing of sites and backhauls transmission to ensure both parties are able to carry higher traffic volumes. The entire exercise is slated for completion by end-2013. As indicated previously, the collaboration is expected to result in incremental cost savings in the future, totaling RM2.2bn over 10 years, starting from 2015 with an average of RM150m- RM250m per year. In addition, both parties have also commenced joint fibre aggregation and trunk rollout.

 

Besides that, a network modernization initiative that involves replacing its entire radio access network for a brand new LTE-ready platform is on target and is slated for completion by end-2012. The new network is expected to deliver highspeed broadband and next generation services with the introduction of a portfolio of bandwidths. The LTE-ready network will ensure faster roll-out of broadband services through wider coverage and enable to deliver substantially faster speed at affordable prices.

 

Widening 3G network. Digi became the fourth operator to enter the Malaysia‟s 3G arena with the launch of 3G broadband in 4Q08. The delayed entry places it behind the competition as its population coverage is still low, standing at 60% compared to Celcom‟s 81.7% and Maxis‟ 81.0%. The company intends to pick up momentum in expanding its 3G population coverage this year to 70% and over 80% by 2015. The wider 3G coverage, better quality and increased capacity will support the company‟s push in gaining market share, especially in signing up new smartphone and tablet users. The network improvements will also allow the company to tap new markets, including users in secondary towns and rural areas as currently only 20% of Digi‟s subscriber base are smartphone users.

 

Positive outlook on smartphone market in Malaysia. According to IDC‟s Asia Pacific Quarterly Mobile Phone Tracker, smartphones are expected to increase their market share in Malaysia‟s mobile shipments in 2012, from 30% last year to 35% this year and projected to exceed 50% by 2014. IDC attributes the increased popularity in smartphones to the increasing models from Apple, Samsung, HTC and Sony, and also the decline in smartphone prices.

 

Current valuation not appealing. Digi shares are trading at FY13 PE of 23.2x and EV/EBITDA of 12.3x - expensive relative to regional peers (average FY13 PE: 14.1x, average EV/EBITDA: 6.3x) and local telco players (average FY13 PE: 21.9x, average EV/EBITDA: 10x). In addition, its FY13 PE and FY13 EV/EBITDA are at the steep premium to its 5-year average of 17x and 8.5x respectively, which are well both the +2 standard deviation. Nevertheless, its potential dividend yield of 5.6% is well above the regional and local average of 4.3% and 4.7% respectively, based on Bloomberg consensus forecast.

 

Source: PublicInvest Research - 19 Sep 2012