Highlights

Local daily reported that DiGi is courting Green Packet (GP) to cut a deal to widen its spectrum base and roll out 4G services by early next year.

The talk involved possible buyout of P1 which is 61% owned by GP valued at RM700m to RM1bn.

However, it was also reported that talk involves two possibilities – an outright sale of P1 or a platform lease sharing deal.

A source claimed that DiGi favors a platform-sharing arrangement as the RM700m price tag for P1 does not make sense, as GP’s market capitalization is less than half of that (RM276.2m).

Lacking fire power in terms of spectrum could see DiGi fall behind in the race to offer the best 4G service.

Comments

We are neutral about this development as DiGi has previously indicated that they are on the lookout to expand their spectrum war chest (refer to our report titled “Breakfast with New CFO” dated 16th Aug).

As other incumbents have already forged their alliances, P1 may be the next best option for DiGi, better than rolling out the high CAPEX intensive 4G services alone.

However, we concur and prefer DiGi to tie-up with P1 based on platform lease sharing rather than buyout as the reported pricing is not justifiable and we do not see great value in WiMAX which is sun setting worldwide.

This collaboration may eventually lead to the introduction of hybrid TDD/FDD LTE network utilizing 2.6GHz frequency spectrum. We believe that FDD-LTE at low frequency spectrums (800MHz and 1.8GHz) is superior considering their global proliferations, availability of devices and propagation characteristics.

This hybrid technology hinges on its success in China (China Telecom) who is the biggest backer as a result of its indigenous technology, TS-SCDMA and also availability of hybrid TDD/FDD LTE devices. Japan’s SoftBank and India’s Bharti Airtel are two other big-name advocates of TDD-LTE.

The Global TDD-LTE Initiative (GTI) has made FDD-LTE interoperability central to its efforts, to enable the seamless coexistence of both options.

Risks

Irrational competition, more delays in network swap / 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 - 10 Sep 2013