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.

• Our forecasts are unchanged as Digi’s payment of RM14mil to the Telenor group to terminate a memorandum of understanding (MoU) and service order for IT infrastructure services accounts for less than 1% of FY18F earnings.

• The MoU and service order was signed for the period Nov 2014-Nov 2016 with Telenor IT Asia Sdn Bhd and Telenor Global Shared Services AS while the settlement sum involved the transfer of some IT infrastructure, severance costs of departing personnel and contract termination charges.

• As this termination between related parties involves only the enterprise IT infrastructure, Digi’s strategic procurement processes with Telenor group for its telecommunication equipment and technology platforms will continue as usual.

• Hence, Digi will still benefit from the synergies and economies of scale as part of the larger Telenor group, which currently has a 49% equity stake in Digi.

• Meanwhile, we expect Digi to be reinstated to the Securities Commission’s syariah compliance list in its May 2018 review, following its exclusion on 24 November 2017 as the percentage of conventional debt would have fallen to 30% of its total assets as at 31 Dec 2017, from 41% as at 31 Dec 2016, vs. the 33% minimum threshold.

• Recall that the temporary jump in conventional debt stems from the lumpy payment of RM599mil for the spectrum fees of the 900MHz and 1800MHz bands on 1 November 2016, which has been rectified with the issuance of a sukuk bond programme of up to RM5bil in 2QFY17.

• We expect the 4QFY17 results, which will be announced on 23 January, to be generally within our expectation. 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.

• The stock currently trades at a fair FY18F EV/EBITDA of 13x near its 2-year average. Given the highly competitive landscape, we expect Digi’s subscriber growth and ARPUs to remain under pressure as both Maxis and Celcom are also aggressively improving 4G coverage and service quality.

Source: AmInvest Research - 18 Jan 2018