Results

Even after one-off adjustment, 9M13 core net profit of RM1.1bn was above HLIB’s estimate, accounting for 79.7% of our full year estimate but shy of street’s estimates by 10.4% if annualized.

One-off last-mile broadband tax incentive amounted to RM44.5m derived based on difference between assumed statutory rates of 25% and 16.7% recorded in 3Q13.

Deviations

Voice revenue performed better-than-expected and lower effective tax rate (FY13 guidance: 20.6%).

Dividends

3rd interim tax exempt (single-tier) dividend of 5.7 sen (3Q12: 12.0 sen) with ex-date on 12 Nov. YTD dividend is 14.3 sen (1H12: 23.8 sen), above our expectations.

Highlights

New milestone: completed network swap project (5.5k sites) with 3G coverage accelerated to 76.1% with HSPA+ enabled. This also marked the end of accelerated depreciation which dwarfed earnings since 2011.

Rollouts: committed to 3G expansion with target of 85% coverage along with 1,500 LTE sites by end of FY14.

3Q13 revenue was stronger with +7.4% yoy due to the lower base as a result of network modernization outages which was estimated to cost DiGi RM40-50m as forgone opportunity cost.

Data: contributes ~31.4% to overall sales, a mere +0.2ppt qoq as messaging revenue continues to be eroded severely by OTT. However, mobile internet (MI) sales momentum was sustainable supported by mass adoption of affordable devices (see Figure #7) with ASP ~RM400 elevating smartphone penetration by 3.6ppt to 34.0%.

Business Trust: reiterate the complexity and may need more time. Still in the midst of clarification from the aspect of operation, tax regime and regulatory.

Guidance: 1ppt dilution on both EBITDA margin (to 45%) and cash-flow margin (to 32%) due to higher handset sales (lower margins) and IDD margins pressure from MYR weakness.

GST: remained mum but we believe it will benefit. Yet to factor in forecast as it is quite distance away (Apr 2015).

Risks

Irrational competition, difficulty in 1800MHz LTE refarming, unable to monetize data revenue, government and regulatory risks.

Forecasts

Tweaked model based on deviations, updated operational parameters and increase dividend payout ratio from 90% to 95%. In turn, this has led to upward FY13-15 EPS revision by 15.0%, 15.1% and 25.3% respectively.

Rating

Hold, TP: RM4.94

Positives – mobile internet growth, margin improvements through collaborations/sharing, capital management via business trust structure, recoup prepaid tax via GST.

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

Valuation

Reiterate our HOLD rating on the stock although our DCF-derived fair value has been raised by 3.1% from RM4.79 to RM4.94 using WACC of 5.95% (previously 5.3%) and TG of 1.0% (previously 1.5% to reflect the downward guidance on margins).

Source: Hong Leong Investment Bank Research - 29 Oct 2013