Results

1H13 core net profit of RM708.7m was within estimate, accounting for 50.7% of our full year estimate but shy of street’s estimates by 17.6% if annualized.

Deviations

In line.

Dividends

2nd interim tax exempt (single-tier) dividend of 4.8 sen (2012: 5.9 sen) with ex-date on Aug 6th. YTD dividend is 8.6 sen (1H12: 11.8 sen), largely within our expectations.

Highlights

2Q13 revenue was flat qoq as 1Q13 was artificially inflated by strong device sales. Both voice and data revenues grew 3.3% and 3.4% qoq respectively to neutralize the contraction in device sales of 25.7% qoq.

2Q13 EBIT improved significantly (21.4% yoy, 18.0% qoq) due to lower provision of accelerated D&A (2Q12: RM145m, 1Q13: RM91m and 2Q13: RM46m). The remaining RM13m will be in 3Q13.

Although data’s contribution was maintained at 34% of service revenue, the mix within has changed. Mobile internet (MI) and broadband now accounts for 57% (2Q12: 43%) of data revenue supported by double-digit growth (+53% yoy, +11% qoq). This is at the expense of messaging (-12% yoy, -6% qoq) and VAS (-15% yoy, 0% qoq) revenues which continue to be eroded by OTT. Will mitigate OTT attrition with innovative pricing schemes.

MI penetration among postpaid was relatively flat, gaining 1-ppt yoy and qoq at 69%. However, it surprisingly spiked among prepaid by 14-ppt yoy and 10-ppt qoq reaching 64%. DiGi explained this phenomenon on the back of:

1. Operational excellence including improved network quality and wider 3G coverage.

2. Targeted campaign with revamped pricing strategy providing multiple and low entry points.

3. Leverage on SKMM youth smartphone subsidy and introduce mid-range devices. Average selling price per device is now slightly above RM1k (see Figure #7).

Plan to table the recommendation of business trust structure by end of the year while sorting out the technicalities to ensure shareholder value creation. Also advised that DiGi is not in any discussion pertaining spinoff of its tower assets.

Risks

Irrational competition, more delays in ZTE network modernization, difficulty in 1800MHz LTE refarming, unable to monetize data revenue, government and regulatory risks.

Forecasts

Unchanged.

Rating

Hold, TP: RM4.79

Positives – mobile internet growth, margin improvements from its network sharing with Celcom. Further capital management via business trust structure could see additional returns to shareholders.

Negatives – Intense competition from U Mobile, MVNOs and OTT players.

Valuation

Reiterate our HOLD rating on the stock on the back of unchanged TP of RM4.79 based on DCF valuation using WACC of 5.3% and TG of 1.5%.

Source: Hong Leong Investment Bank Research - 22 Jul 2013