- We maintain our HOLD call on Digi but trim our fair value to RM6.10/share (from RM6.50/share previously) after the release of Digi’s 2Q15 results, which were below expectations. The group reported net profit of RM464mil for 2Q15, which brought 1H15 earnings to RM944mil, accounting for 43% and 45% of our and consensus full-year estimates, respectively.

- Despite coming off a seasonally weak 1Q, 2Q15 earnings had weakened further (-3% QoQ, -7% YoY). Besides the interim weaker spending post GST implementation, Digi was also impacted by price competition and operational challenges.

- Mobile revenue growth momentum continued to weaken to just 1.3% YoY from +2.2% YoY in 1Q15 and +3.3% in FY14. Data revenue growth was weaker at +12.5% YoY (vs. circa +18% YoY in the past three quarters), especially for prepaid which saw flattish growth of 0.5% YoY (-2% QoQ). Voice revenue fell 5.6% YoY during the period (YTD: -6.2%).

- On a positive note, subscriber growth momentum is sticking (blended: +8% YoY, net add: 124K) and this is still mainly driven by prepaid (+9% YoY). We would however, look at this in the context of the absence of Celcom, which had only returned to the postpaid market in mid-2Q15 (and prepaid, scheduled in 3Q15). 

- Blended ARPU fell 6% YoY (given a higher subs base but flattish service revenue growth), and again, this was largely driven by the prepaid segment (-7% YoY). 

- Reported EBITDA margins improved due to lower device revenue – sales were focused on affordable smartphone bundles vs. past two quarters which were partly driven by new Samsung and iPhone launches. However, underlying EBITDA/service revenue was lower YoY due to the weaker MYR (which impacts IDD cost mainly) and stiff price competition.

- Competitive pressure is expected to rise in postpaid – price competition is already seen for entry level postpaid plans. Celcom made a comeback with Basic First38 in mid-2Q15 and peers are reacting – this could have an impact in 3Q15. The issue might spread into prepaid as Celcom is moving to introduce a new prepaid plan in 3Q15. We trim our FY15F/16F/17F earnings by 9%/8%/8% to reflect lower prepaid revenues and lower EBITDA margin assumptions. We now expect earnings to fall 1% YoY (from +9% previously).

- Digi has so far performed at the lower end of guidance (at 1.8% revenue growth YTD and 44.5% EBITDA margins). Balance sheet is strong (net debt to EBITDA of just 0.3x) but dividend payout is constrained by retained earnings deficit. Business trust is a potential dividend catalyst, but it has been under review for ~2 years.

Source: AmeSecurities Research - 14 Jul 2015