Results 

• 9M14  top  line  of  RM5.22bn  was  translated  into  a  much anticipated  core  net  profit  of  RM1.47bn,  accounting  for 75.1%  and  75.6%  of  HLIB  and  consensus’  full  year estimates, respectively.

Deviations

• In line.

Dividends

• 3 rd interim  tax  ex empt  (single-tier)  dividend  of  6.2  sen  per share  (3Q13:  5.7  sen),  a  99%  payout  yielding  1%.  Ex-date on  5 th Nov .  YTD  dividend  amounted  to  18.8  sen  per  share (1H13:  14.3 sen), within our expectations.

Highlights 

Subscriber  acquisitions  regained  momentum  wit h  prepaid and  postpaid  rose  by  440k  and  2k,  respectively  enlarging total  base  to  11.3m  after  2  consecutive  quarters  of lethargic additions.  DiGi  attributed  this  to  effective  prepaid smartphone  bundles  and network trial campaigns.

Service  revenue  grew  resiliently  (+2.0% yoy and +1.0% qoq) to  RM4.7bn  thanks  to  strong  internet  revenue  gain  (+ 40.3% yoy  and  9.8%  qoq)  as  usage  volume  was  more  than sufficient  to  undo  its  cannibalization  effect  on  SMS  (-19.1% yoy  and  -7.7%  qoq)  and  voice  (-6.2%  yoy  and  -1.3%  qoq) revenues.

Data  contributes  39.9 % to service revenue (+5.6ppt yoy and +1.8ppt qoq),  almost equivalent  to 40.4% of blended  ARPU.

Postpaid  ARPU  declined  marginally  to  RM82  (-RM1  qoq)  in tandem with MOU which also fell by 3.4% qoq. W hile, stable prepaid  ARPU  of RM41 reflects  flattish MOU.

Although  rivalry  intensified  resulting  in  prepaid  and  data pricing pressures, DiGi maintained  its guidance for  2014.

Expect  positive  GST  impact  but  no  guidance  was  shared and  opined  that  this  to  will  be  determined  by  market dynamics. No update on business trust structure.

Risks

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

Forecasts

• Updated  cost  model  based  on  latest  operational  data resulting  in  upward  revisions of FY14-16 EPS by 4.0%, 4.2% and 4.6%, respectively.

Rating

BUY, TP: RM6.30

• 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  to  BUY  from  TRADING  BUY  after  raising  DCF derived  TP  (based  on  unchanged  WACC  of  6.0%  and  TG of 2.0%) by 7.7% from RM5.85 to RM6.30  as valuation is   rolled forward  to  FY16  as  well  as   reflecting  the  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 - 21 Oct 2014