Results

Excluding one-offs, FY13 core net profit of RM1,612m came in within expectations, accounting for 100.8% and 95.1% of HLIB and consensus full year estimates respectively.

One-off last-mile broadband tax incentive amounted to RM80.5m (3Q13: RM44.5m, 4Q13: RM36.0m) derived based on difference between statutory rates of 25% and effective tax rates in the respective quarters.

Deviations

In line.

Dividends

4th interim tax exempt (single-tier) dividend of 7.0 sen (4Q12: 2.5 sen) with ex-date on 19 Feb.

As expected, YTD dividend amounted to 21.3 sen (FY12: 16.8 sen).

Highlights

As promised: the modernized network enabled DiGi to benefit to the full potential in 4Q13, leveraging on solid increase in data / internet services, helping it to deliver results as per guidance that was revised lower in 3Q13.

D&A: significantly lower in 4Q13 due to lower CAPEX as well as lower asset base after the accelerated D&A.

Data: contributes ~32.1% to overall sales, +0.7ppt qoq as internet revenue growth continue to be dwarfed by fall in messaging revenue, eroded by OTT. Mobile internet (MI) sales momentum gained as smartphone penetration rate rose to 38.1% (+4.1ppt qoq) even though device sales volume dissipates after the end of youth smartphone subsidy campaign by SKMM.

Device: ASP rose sharply to RM1,733 (see Figure #7) as demand was mainly for iPhone 5S and year-end sales.

Rollouts: committed to 3G HSPA+ expansion with target of >85% coverage (currently 80%) along with 1k LTE sites by end of FY14.

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: top line growth of 4% - 6%, outperforming sector’s expected growth of 4% while maintaining FY13’s EBITDA margin of ~45%. CAPEX to trend higher in FY14 compared to FY13.

Risks

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

Forecasts

Updated model based on latest data resulting marginal revision of FY14 EPS by -1.4% while FY15 remained unchanged.

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 call on the stock with TP of RM4.94.

Our DCF-derived fair value is maintained despite revising our WACC to 5.91% from 5.95% while TG is kept at 1.0%.

Source: Hong Leong Investment Bank Research - 7 Feb 2014