- We maintain our BUY call on Digi with a higher DCFderived fair value of RM6.30/share (vs. RM5.80/share previously) after the release of its 2Q14 results yesterday.

- Digi reported core earnings of RM499mil for its 2Q14, bringing 1H14 core net profit to RM984mil. This is ahead of our forecast – accounting for 110% of our FY14F earnings, if annualised, and 104% of consensus.

- Key deviation was lower than expected depreciation rate, while top line growth was also stronger than expected at 5% YTD growth vs. our earlier FY14F assumption of a 4% revenue growth (which was at the lower end of management guidance).

- We have adjusted lower our depreciation assumptions and raised our revenue growth assumption (to +5.6% YoY), closer to the higher end of management guidance of 4%-6% to reflect the stronger-than-expected 2Q14 result. Our FY14F-16F earnings are raised by 9%-16%.

- The upward earnings revision also raises our dividend forecast, which is pegged at 100% payout ratio. Dividend yield now stands at 4.7% based on our new assumptions.

- Internet revenue rose 40% YoY in 2Q14, which more than offset a moderation in voice (-4% YoY) and SMS revenues (-17% YoY). This suggests that Digi’s strategy to attract new data users and stimulate usage from existing low data users via the introduction of bite-sized data plans (i.e. daily, weekly, and monthly data plans) is gaining strong traction.

- Secondly, the subscriber decline seen in 1Q14 (-1% QoQ) was reversed in 2Q14 (+0.2% QoQ) given the strong takeup of smartphone bundles. Digi rejigged its postpaid plan by lowering entry level commitment to a minimum RM50 (from circa RM70 previously), which enticed new subscriber induction.

- The 1800 MHz and 900 MHz spectrum are up for renewal early next year. At this point, management expects a status quo in its spectrum holding. However, should there be a re-farming or a re-bidding exercise, Digi would have the opportunity to level out its holding with peers in these bands and this could be a positive for the group.

- While Digi’s share price has performed strongly over the past six months, it has been backed by an earnings upcycle. Valuation is decent at 21x, trading below its historical average PE of 25x (See chart 2). Dividend yield remains attractive at 4.7%. Dividend surprise could come from conversion to business trust, though this is still work in progress at this point.

Source: AmeSecurities