Investment Highlights

• We maintain our HOLD rating on Digi.Com with an unchanged DCF-based fair value of RM4.50/share, which implies an FY18F EV/EBITDA of 13x, the stock’s 2-year average.

• Digi held an analyst briefing yesterday with its CFO Nakul Sehgal, other senior management and investors. These are the salient takeaways from the meeting:

• Digi has been excluded from the Securities Commision’s (SC) shariah compliant list starting on 24 November this year as the percentage of conventional debt reached 41% of its total assets as at 31 Dec 2016, above the 33% minimum threshold. This followed the lumpy payment of RM599mil for the spectrum fees of the 900MHz and 1800MHz bands on 1 November 2016.

• Since 2QFY17, the group has issued a Sukuk bond programme of up to RM5bil, lowering the percentage of conventional debt to total asset to 30%. Currently, RM4.1bil of the Sukuk bonds have yet to be disbursed, which should be more than sufficient to meet the spectrum fees for the upcoming bids for the 700MHz and 2600MHz bands.

• The management re-emphasised on enriching Digi’s digital experience for customer care as the next stage towards an omni-channel platform comprising seamless online and offline solutions. This involves the MyDigi app, live chats and the launch of a cloud-based AI-enhanced chatbot next month. Together with profitability assurance and product differentiation programmes in its core digitalisation, this has led to a 40% decrease in voice traffic to call centres this year while an additional 40% is targeted to be diverted to live chats by 2020.

• The prepaid segment, which accounts for 80% of 3QFY17 subscribers, is likely to contract further on competitive pressures in the low-income market amid declining migrant workers.

• Hence, digitalisation is to drive product simplification and monetise new revenue streams while enhancing operational efficiency. For example, the MyDigi app has been used for upsell transactions for postpaid and prepaid with over 17mil transactions in 3QFY17.

• The stock currently trades at a fair FY18F EV/EBITDA of 13x near its 2-year average.

Source: AmInvest Research - 28 Nov 2017