Results

1H15 top line of RM3.5bn was translated into core net profit of RM943.6m, accounting for 46.0% and 45.5% of HLIB and consensus’ full year estimates, respectively. This is regarded in line considering the seasonally weaker quarter while expecting GST boost in 2H15.

Deviations

• Broadly in line.

Dividends

• Declared 2nd interim tax exempt (single-tier) dividend of 5.9 sen per share (2Q14: 6.4 sen), representing 99% payout, which goes ex on 5 Aug 2015. YTD dividend amounted to 12 sen per share (1H14: 12.6 sen).

Highlights

• First sequential top line weakness in 2Q since 2009 as DiGi undertook a paradigm shift in driving data growth amidst intensified competition and challenging environment where market sentiments were dampened by GST confusion. 

• Perceive that existing market bloodshed is not sustainable and is just temporary considering that cellcos have heavy investments ahead to catch up with technology evolution. Currently, Big 3’s promotional postpaid plans will end within July, while U Mobile’s by end of Aug. Will begin to reap GST benefits in 3Q15 as the transitional measure to overcome new tax impact by offering free airtime minutes and SMS expired on 3rd Jul.

• Data will continue to be the main growth driver, especially in the prepaid segment which has 54.7% internet adoption rate vis-à-vis to postpaid’s 76.3%.

• New policy control and charging (PCC) engine will further enhance data monetization supporting real-time innovative pricing including volume, time, and event based charging. This is particularly suitable to offer prepaid market with targeted bite-sized packages.

• More than 65% population across all the 5 key markets centres have LTE coverage with at least 5Mbps downlink.

• 2015 guidance remains unchanged: low to mid-single digit service revenue growth, sustaining EBITDA margin (~45%) and CAPEX (RM900m) similar to FY14 level.

Risks

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

Forecasts

• Unchanged.

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

• Share price has plunged 10.7% since our last report, hence we upgrade from HOLD to BUY with unchanged DCFderived fair value of RM6.30 based on WACC of 6.0% and TG of 2.0%.