Results

• FY15 turnover of RM6.9bn was translated into a much anticipated core net profit of RM1.8bn, accounting for 98%- 99% of HLIB and consensus’ FY estimates, respectively.

Deviations

• In line.

Dividends

• Declared 4th interim tax exempt (single-tier) dividend of 4.9 sen per share (4Q14: 7.2 sen), representing 100% payout, which goes ex on 25 Feb 2015. YTD dividend amounted to 22.0 sen per share (1H14: 26.1 sen).

Highlights

• Despite the challenging operating environment, DiGi met all its guidance on the normalized basis. FOREX was the main culprit inflating IDD traffic cost.

• Attrition in 3Q15 has led to fight back in subs acquisition in 4Q15 and succeeded in gaining market share with postpaid and prepaid net adds of 64k and 386k, respect ively elevating total base to 12.1m, up from 11.4m in FY14. Retaining these rotational churners will be crucial going forward.

• Excluding device sales, FY15 service revenue actually came in flat where internet growth (+21.3% yoy) sufficiently offset the declines in voice (-6.9% yoy) and SMS (-15.0% yoy).

• Postpaid performance was commendable in 4Q15 thanks to improved data network coverage and quality. Larger sub base boosted sales growth of 1.6% qoq and 3.4% yoy to RM450m on a marginal expense of lower ARPU of RM80.

• LTE availability reached more than 65% coupled with LTE-A with carrier aggregation covering 28.8% population in key markets. This has led to rapid 4G adoption rate with 2.3m subs or 19% of total base.

• Excited about the new spectrum allocation on 900MHz band. Plan to deploy LTE on this new contiguous assignment and expect to achieve greater efficiency.

• Similar to Maxis, DiGi guided for a flat FY16 with service revenue, EBITDA and CAPEX to sustain at FY15 level.

Risks

• Regulatory risks, irrational competition, exorbitant spectrum fee and unable to monetize data revenue.

Forecasts

• Unchanged.

Rating

BUY , TP: RM5.78

Positives

• mobile internet growth, margin improvements through collaborations/sharing, capital management via business trust structure.

Negatives

• Intense competition from U Mobile/MVNOs and cannibalization by OTT players.

Valuation

• Reiterate BUY on the back of unchanged DCF-derived TP of RM5.78 based on WACC of 4.6% and TG of 0%.
• Still our top pick for the sector due to its under-leveraged balance sheet capable of supporting spectrum fee with steady dividend payout. Low frequency band would enhance its efficiency.

Source: Hong Leong Investment Bank Research - 10 Feb 2016