- We re-affirm our BUY call on DiGi following the release of its 1Q14 results. Our DCF-derived fair value is unchanged at RM5.80/share. DiGi reported a net profit of RM485mil for its 1Q14. This is in line with our and consensus estimates, accounting for 27% and 26% of full-year estimates, respectively.

- Earnings were up 48% YoY mainly due to the absence of accelerated depreciation. Revenue grew 4% and EBITDA was up 8%. Positively, the topline was driven by service revenue (+5% YoY). Device sales dropped 4% YoY.

- Subscriber growth saw a seasonal churn (-1% QoQ, +5% YoY), but usage improved. Data revenue was up 15% YoY (+2.5% QoQ), while voice was resilient (+0.5% YoY, -3.6% QoQ). More importantly, margins were up YoY, in line with internal target to maintain margins at the 2013 level of 45%, despite revenue growth that is primarily driven by data.

- On a QoQ basis, there was some dilution to margins given a 1% revenue contraction (voice revenue: -3.6%, data: +2.5%) and higher cost related to network expansion. DiGi aims to hit 86% of the population coverage for its 3G network vs. 82% as of 1Q14. Meanwhile, the pressure on IDD margins may subside in the coming quarters as management has managed to work through various agreements to find ways to compensate for forex pressure on its IDD terminations.

- Generally, DiGi’s 1Q14 was a quarter of reconfiguration:-

- (1) DiGi strengthened organisational abilities across distribution and product offering by adopting a more granular approach in distribution, marketing and network management (ala Celcom’s “Project Zoom”, in our opinion).

- (2) New organisational structure: key changes included the appointment of a dedicated Chief Sales Officer and Chief Corporate Affairs Officer.

- (3) Launched new bite-sized internet plans for prepaid and new postpaid plans in late 1Q14, to capitalise on its modernised network.

- An interim dividend of 6.2sen (99% payout ratio), which is 63% higher than last year, was declared. The group is still looking at business trust as a means to optimise balance sheet, though no development has been seen so far.

- FY14F capex is seen at circa RM900mil, mainly for 3G coverage expansion and LTE rollout (1,500 sites by year-end). Management is looking at spectrum opportunities in the higher frequencies, either via partnerships or acquisitive options. However, priority is for the lower frequency spectrum to address its weakness.

Source: AmeSecurities