- We reaffirm our BUY call on Digi following the release of its sterling 4Q13 results. Our DCF-derived fair value is raised to RM5.80/share (from RM5.65/share previously) following upward earnings revisions in this report.

- The group reported 4Q13 net profit of RM549mil (+123% YoY, +22% QoQ), which brought FY13 earnings to RM1.7bil (+42% YoY). This is in-line with expectations and accounted for 104% of our forecast.

- Key takeaways from results:- (1) Digi was able to sustain margins despite deteriorating SMS revenues (which is an industry wide trend) and the typically lower margin data business, by improving data ARPU and due to strong increase in MI penetration for the postpaid division (See Chart 1); (2) Reduction in handset subsidies given a 75% QoQ (-5% YoY) reduction in device sales; and (3) Improved opex to revenue – mainly from operational cost improvements. EBITDA margins improved 2pp YoY to 47% in 4Q13 and the absence of accelerated depreciation drove bottomline 123% higher YoY and net profit margins by 16.5pp to 32% in 4Q13.

- Management’s FY14F revenue growth guidance of 4%-6% was a positive surprise versus our earlier and conservative 3.8% revenue growth assumption, and compared to industry growth of 4% (FY14F). Key revenue drivers are expected to come from:- (1) Increase 3G/HSPA+ coverage to >85%, LTE rollout of slightly >1000 sites; (2) Increase usage from early mobile Internet adopters within existing subs base; and (3) New bundles for mature segments.

- Digi expects to maintain EBITDA margins at circa 45% in FY14F, marginally lower than our earlier estimate of 45.6%. Despite having a more efficient modernised network, savings are expected to be ploughed back into subscriber acquisitions with a focus on higher value customer segments. We have fine-tuned our forecasts accordingly and raised FY14-16F earnings by 0.8%-1%.

- The growth in network coverage positions Digi well to capture new market share. Meanwhile, a more efficient modernised network positions Digi well to monetise the strong growth in new sub in FY13 in order to further raise data ARPU. Digi’s data ARPUs range from RM2-3/month to RM30/month.

- There are no developments yet on business trust, but this could be a strong catalyst. Digi has an underleveraged balance sheet with a net debt-to EBITDA of just 0.1x. We estimate that yields could rise to 5.6% (from 4.7% - FY14F) if Digi is allowed to payout dividends out of its free cash flows. Valuations (PE, See Chart 4) have dropped below historical average. Given an expected above industry growth rate, resilient margins and Digi’s position which is at the cusp of improvement in its ability to monetise its subs base via a modernised network, we think that the stock is set for a strong re-rating.

Source: AmeSecurities