- We maintain our HOLD call on Digi at an unchanged fair value of RM6.50/share. Digi reported net profit of RM479mil for the 1Q15. This is at the lower end of our expectation, accounting for 22% of our FY15F earnings and 23% of consensus, although 1Q14 is notably a shorter quarter.
- Mobile revenue growth momentum was weaker at +2.2% YoY in 1Q15 compared to +3.2% last quarter. While data revenue growth was sustained at around +18% YoY, voice revenue’s decline was steeper (-7% YoY vs. -5% YoY in 4Q14).
- EBITDA declined 0.5% YoY (-3% QoQ) on weaker margins despite a 4% YoY growth in total revenue. This is the 2nd consecutive quarter in the past 15 months that Digi had registered a contraction in earnings.
- Competition in the prepaid segment seems to have intensified. Digi’s prepaid ARPU took a big hit, falling 2% YoY (-5% QoQ) to RM39. Price aggression, particularly in the IDD segment, on top of increased competition, drove the fall in earnings.
- EBITDA margins continued to contract. Although 1Q15 entailed a substantial increase in device revenue given the spillover impact from new device launches since mid- 4Q14, Digi’s appetite for subs growth (significantly higher net add QoQ) is also driving down underlying service revenue margins (see Exhibit 2).
- Guidance of low-to-mid single-digit revenue growth and similar EBITDA margins (of 45%) to that for FY14 remains. Any improvements will likely come in 2H15 as 2Q15 earnings could remain subdued given the initial impact of the GST implementation.
- Capex guidance is still maintained at RM900mil i.e. similar to FY14’s level and at this point there is no intention to increase it despite higher competition. Meanwhile, the new and cheaper broadband plan (as per government’s directive) is only for large screen and does not involve the small screen segment.
- There was a slight decline in interim dividend payout (at 6.1sen/share vs. 6.2sen/share in 1Q14), but Digi has the balance sheet to pay out more (than 100% of EPS). Business trust is still being considered as one of the options for capital management.
- Dividend yield of 4.4% is decent but from a valuation standpoint, Digi is no longer cheap at 14x FY15F EV/EBITDA. Furthermore, Digi entails the highest forecast risk among the celcos if there is failure to pass through the GST, or if there is elasticity in demand, given expectations that have been built into current projections.
Source: AmeSecurities Research - 29 Apr 2015
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