-  We reaffirm BUY on Digi at an unchanged fair value of RM6.30/share. Digi reported core net profit of RM487mil for its 3Q14, which brought 9M14 core earnings to RM1.47bil. This is broadly within expectations – accounting for 71% of our and 75% of consensus’ full-year estimates.

-  EBITDA and topline both accounted for 73% of our FY14 estimate. We think 4Q14 could show stronger momentum given the introduction of new smartphone models i.e. the Iphone 6 and Note 4, on top of subs growth seen in 3Q14.

-  Topline growth of 4% in 3Q14 was at the lower end of guidance of 4%-6%. Digi cautioned of increased price competition in voice (mainly in prepaid, migrant segment) and data. This, besides its billing system migration, caused EBITDA margins to shrink slightly to 45% in 3Q14.

-  However, subs growth was still gaining momentum (prepaid subs: +5% QoQ, postpaid: +0.1% QoQ) and we think this better reflects Digi’s positioning in the market instead of mere topline growth, which is affected by industry-wide price competition. Data revenue growth more than offset a fall in voice and SMS revenue.

-  Earnings were quite weak in 3Q14 (-2% QoQ, albeit up by 9% YoY), due to a major migration to a new converged billing system. The new system is now up and running and in the stabilisation phase.

-  Positively, it improves Digi’s ability to monetise its modernised network better as it allows Digi to:- (1) deliver more flexible pricing and product structure in its bundles – especially in monetising data; (2) improves lead time to support go-to-market launches; (3) supports dynamic charging functionalities; (4) enables better customer insights which helps improve granularity in market segmentation approach in marketing and product positioning; and (5) optimises cost structure – but no clear guidance was given on expected savings.

-  Digi announced interim dividends of 6.2sen/share (9M14: 18.8sen/share), which is a 99% payout ratio vs. 9M13’s 96%. This is more or less in line with our forecast payout of 100%.

-  Capex intensity is expected to be maintained at 10%-12% of revenue in FY15F. Our forecast is at the mid-point of this range at 11% and represents a fall from FY14’s 13%, which was exceptionally high driven by the billing system upgrade.

-  Despite increasing competition, we like Digi for stock specific reasons: (1) Biggest beneficiary of GST; (2) Much better ability to monetise subs via a modernized network; (3) Biggest beneficiary of affordable smartphone introductions given its niche in prepaid and lower market segments; (4) Potential beneficiary of spectrum refarming given its current disadvantage in lower spectrum bands; and (5) 3G data coverage expansion.

Source: AmeSecurities