- We maintain our HOLD call at a higher DCF-derived FV of RM4.70/share after rolling over our valuation base to FY14. Digi’s 1H13 results were in-line with revenue and EBITDA accounting for 49% and 47% of our FY13F estimates. 1H13 net profit of RM709mil accounted for just 42%, but should improve in 2H13 as the impact of accelerated depreciation wears off i.e. RM150mil for FY13 (of which RM91mil were booked in 1Q13 and an estimated RM46mil in 2Q13) vs. RM525mil in FY12.

- Digi managed to address the net churn last quarter to register a net add of 176K (Prepaid subs: +2% QoQ, Postpaid: +0.4% QoQ) following targeted prepaid campaigns and postpaid retention initiatives. Mobile internet (MI) subs (+25% YoY, +16% QoQ) saw strong traction as a result of:- (1) Introductory data offer for new prepaid packs; (2) Strong take-up for affordable smart devices bundled with internet packages; (3) Expansion of 3G coverage (to 72% from 68% in 1Q12). Digi’s 2Q13 data revenue growth (+16% YoY) was driven mainly by MI (+53% YoY).

- ARPU trends are improving for prepaid albeit it was still deteriorating for postpaid, but net-net, it saw a 2% QoQ improvement and is back to 1H12 levels of RM48/sub. Digi’s revamped plans in 1Q13, which involved higher pricing for simpacks and increased monthly commitment fee seems to be showing results.

- Overall revenues improved 4.8% YTD and management reiterated its guidance for a 5%-7% FY13F revenue growth, implying a stronger 2H13 revenue momentum driven by increased mobile internet uptake from new 3G coverage (75% target by end FY13) and completion of network modernisation. Additionally, 2H12 was negatively impacted by network issues, hence a weak base.

- 2Q13 EBITDA margins improved sequentially as device sales came off (-25% QoQ), but is 2.5ppts lower YoY given higher IDD traffic cost and higher device bundle cost. Nonetheless, the 44% EBITDA margin is close to management guidance of 46% for FY13F. Cost efficiency is improving i.e. -3% QoQ given stabilising handset related expenses, while opex remained flat YoY despite a 5% YoY revenue increase. Meanwhile, completion of network modernisation should result in further cost savings from 3Q13.

- Interim dividends of 4.8sen were 19% lower YoY and payout ratio reduced to 94% of earnings vs. >100% last year. This does not come as a surprise as management highlighted previously that there is little room for further capital management. Digi is still sticking to policy of min. 80% payout.

- However, adoption of the business trust structure could mean upside to dividend payout, while parent Telenor’s capex requirement in Myanmar could mean it wants to extract more cash out of Digi. Management is still assessing pros and cons of adopting such a structure.

Source: AmeSecurities