Results

1Q14 core net profit of RM485.2m surprised on the upside, exceeding ours and street’s full year estimates by 10.4% and 6.4% respectively, if annualized.

One-off last-mile broadband tax incentive amounted to RM36.0m recognized in 4Q13 derived based on difference between statutory rates of 25% and effective tax rates.

Deviations

Lower-than-expected D&A.

Dividends

1st interim tax exempt (single-tier) dividend of 6.2 sen (1Q13: 3.8 sen) with ex-date on 9th May.

This represents a 99% payout with a yield of 1.2%.

Highlights

Data: contributes ~33.2% to overall sales, +1.1ppt qoq as internet revenue growth sufficiently neutralized the fall in messaging revenue due to OTT cannibalization. Mobile internet (MI) turnover grew resiliently by 7.8% qoq topping RM374m although smartphone penetration was relatively unchanged at 38.4% (+0.3ppt qoq) implying increased consumption on the back of stronger data network coverage and quality.

Core PAT leaped by 47.6% yoy in the absence of accelerated D&A. DiGi guided that this will be the quarterly D&A run rate (~RM120m) with slight increasing trend along with CAPEX.

Rollouts: committed to 3G HSPA+ expansion with target of 86% population coverage (currently 82.2%) along with 1.5k 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.

CAPEX guidance ~RM900m or ~12.5% of sales.

Risks

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

Forecasts

Updated model based on deviations above resulting in upward revisions of FY14-16 EPS by 8.8%, 6.3% and 4.9% respectively.

Rating

TRADING BUY, TP: RM5.77

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

Upgrade from HOLD to TRADING BUY after earnings upward revision and rolling over our valuations to FY15 which led to a higher TP of RM5.77, +16.8% from RM4.94.

DCF valuation is based on WACC of 6.0% and TG of 2.0% compared to previous’ 5.9% and 1.0% respectively. A higher TG is justified as the modernized network coupled with the refreshed DMT would thrust DiGi to the full potential, leveraging on data / internet services

Source: Hong Leong Investment Bank Research - 28 Apr 2014