Results

1H14 top line of RM3.46bn was translated into a much anticipated core net profit of RM984.1m, accounting for 51.5% and 51.7% of HLIB and consensus’ full year estimates, respectively.

Deviations

In line.

Dividends

2nd interim tax exempt (single-tier) dividend of 6.4 sen per share (1Q13: 4.8 sen), a 100% payout yielding 1.1%. Exdate on 5th Aug. YTD dividend amounted to 12.6 sen per share (1H13: 8.6 sen), within our expectations.

Highlights

Newsbreak: signed MOU with Digistar to provide real-time wireless data connections, complementing the latter’s surveillance and security platform (M2M).

Service revenue grew sustainably (+2.8% yoy and +0.9% qoq) to RM3.1bn thanks to strong internet revenue gain (+39.6% yoy and 9.4% qoq) as usage volume was more than sufficient to undo its cannibalization effect on SMS (-6.0% yoy and -4.1% qoq) and voice (-4.1% yoy and -1.3% qoq) revenues.

Data contributes 38.1% to service revenue (+4.4ppt yoy and +1.4ppt qoq), almost equivalent to 40% of blended ARPU.

Postpaid ARPU increased to RM83 (+RM2 qoq) on the back of 1.7% qoq expansion in MOU while stable prepaid ARPU of RM41 reflects flattish MOU.

Confident and optimistic to renew its soon-to-be-expired NSP/NFP licenses (Jan 2015) along with existing spectrums without going through tendering process.

Halfway through in rolling out the planned 1.5k LTE sites for FY14. DiGi believes it has sufficient spectrum and target to have 50% LTE population coverage by 2017.

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.

Risks

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

Forecasts

Updated cost model and D&A based on latest run rate resulting in upward revisions of FY14-16 EPS by 2.4%, 2.4% and 2.3%, respectively.

Rating

TRADING BUY, TP: RM5.85

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 TRADING BUY after raising our DCF-derived TP (based on unchanged WACC of 6.0% and TG of 2.0%) by 1.4% from RM5.77 to RM5.85 chiefly to reflect our upward earnings revision. DiGi’s 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 - 18 Jul 2014