Highlights

Official introduction to new CFO, Karl Erik Broten who took over from Terje Borge in May. Karl previously served as CFO in Telenor Hungary (Pannon) and Pakistan.

Market dynamics: traffic peaked during Raya celebration as usual while continue to feel the pressure in IDD segment. Data to remain the key driver, partly enticed by SKMM youth programme (RM200 subsidy) and introduction of more affordable smartphones. More data traffic coming from tablet users and plan to introduce packages with tablets priced below RM800 in 3Q13 and 4G tablets in 4Q13.

Educate and create market awareness of 4G / LTE: expect more marketing and advertising expenses in 2H13, in conjunction with more festive promotions. Increase data usage by promoting local app and content creations including video and music streaming.

Network and coverage expansions: 75% 3G coverage and target for 1,500 LTE sites by FY14. At this juncture, only utilizing 2.6GHz spectrum for LTE.

Capital management: business trust framework is vague and still being evaluated from many perspectives including financial impacts, taxations, costs, etc.

Management guidance: unchanged from 1H13 results conference call. Stronger 2H13, partly due to weaker base of 2H12 which was impacted by ZTE network modernization hiccups (~opportunity loss of RM40-50m). CAPEX remains at RM750m or 11% of sales. Dividend payout >80%.

Comments

We left the meeting feeling neutral as the outcome was generally in line with our outlook on the sector.

DiGi shared that they are exploring ways to acquire low frequency bands (900MHz). We think that this will be very challenging given that the two incumbents (Maxis and Celcom) will be unwilling to give up easily as it is valuable for 3G refarming.

Without more capacity, carving out 1800MHz for LTE will result in possible degradation to 2G network quality and depending on 2.6GHz alone will be costly and not efficient compared to its peers.

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 - 16 Aug 2013