• We re-initiate coverage on DiGi.Com Berhad (Digi) with a BUY recommendation premised on (i) a gradual recovery in roaming contribution driven by a surge in migrant workers and tourist prepaid SIM card in line with the reopening of international borders (ii) a resilient EBITDA margin of 47%, above its peers (iii) a sanguine outlook for the B2B segment propelled among others by the reacceleration of economic activities globally and (iv) a spin off from its potential merger with Celcom which will push the new entity to become the leading telco with the largest customers base and market capitalisation.

• We are positive on its merger with Celcom in view of maximise shareholder returns given the expected synergy, a boon due to a fast-saturating market.

• We also admire DIGI’s persistence in rewarding its shareholders with 100% of net profit as dividend, a feat that is expected to continue in the foreseeable future.

• We value Digi at RM4.00, derived based on DCF valuation with a WACC of 5.0% and a long-term growth of 1.4%.

Integrated telco player in Malaysia

Digi is a pioneer in Malaysia’s cellular market where the group has grown by leaps and bounds over the years to become a highly competitive and integrated telco. Digi is primarily engaged in the provision of mobile telecommunication services and its related products in Malaysia. The group’s merit includes the highest average download speeds in Malaysia or at 20.5 mbps, a testament given by Opensignal, a respected analytics company based in London (UK).

Do not anticipate any dissenting opinion on Celcom-Digi merger

The merger of the two companies could lead to a combined RM40.0bn in market capitalization which will position Celcom-Digi as the leading player in the telecommunication sector. The deal will benefit both not only in terms of combined talent & technology but also in cost reduction, economies of scale and therefore, a healthy profit margin.

Anticipate DIGI to maintain its 100% dividend payout ratio

Historically, we learnt that the company has been paying more than its dividend policy of distributing 80% of net profits and believe this will continue in the foreseeable future. Assuming a 100% dividend payout ratio, we expect Digi to declare 14.0 sen/15.0 sen/16.0 sen dividend per share for 2022E/ 2023F/2023F respectively, translating into a decent 4.0%-5.0% yield at the current price.

Re-initiate with a ‘BUY’ call and TP of RM4.00

We re-initiate coverage on Digi with a BUY call at TP of RM4.00. Our valuation is derived based on DCF valuation with a WACC of 5.0% and a long-term growth of 1.4%. The share price has declined by 17.0% YTD and this may be triggered by uncertainties over its merger with Celcom. We see no reason for the merger to fall through and this presents an opportunity for investors to accumulate on dip given an attractive total return of c.15.5%.

Source: BIMB Securities Research - 4 Oct 2022