Highlights

• The Analyst Day was concluded with positive takeaways. Although near-term macro challenges create volatility, DiGi is not troubled and continues to invest ahead elevating service quality to the next level.

• While easing prepaid service tax beginning 3Q15, GST has impacted consumer sentiment and wallet share for telco.

• Weak RM will impact outbound IDD calls settlements which usually denominated in USD. While this will partly offset by inbound’s payments, it has re-negotiated IDD rates with partners to mitigate the currency risks.

• Rivalry remains elevated with U Mobile’s recent introduction of HERO postpaid plans. We concur DiGi’s view that existing market bloodshed is not sustainable considering that cellcos have heavy investments ahead to catch up with technology evolution.

• Relentlessly drive stronger data usage and growth through partnerships with OTT with iflix being the latest addition to DiGiMusic and HyppTV Everywhere.

• First to announce LTE-Advanced (LTE-A) aiming to deploy by 4Q15 or 1Q16. LTE-A will unlock carrier aggregation (CA) feature which pools spectrums from different bands to offer greater bandwidths to subscribers. DiGi is exploring the combination of 1.8GHz and 2.6GHz.

• Target to achieve nationwide 4G population coverage of 45% by FY15 and more than 75% by FY17.

• To support its data ambition, DiGi continues to invest in fibre backhaul with the plan to own 6,000/9,000/10,000 km by FY15/16/17. Collaboration with Celcom is effective leading to speedy rollout and cost savings.

• Also preparing for VoLTE and VoWiFi (voice over LTE and WiFi) which offer high definition voice services replacing service fallback, better adapted for data only ecosystem.

• Albeit the above mentioned challenges, 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

• Reiterate BUY with unchanged DCF-derived fair value of RM6.30 based on WACC of 6.0% and TG of 2.0%.

Source: Hong Leong Investment Bank Research - 8 Sep 2015