Highlights

• With its base reaching 12.3m in 1Q16, DiGi emerged as the largest telco in Malaysia measured by subscriber.

• Transforming into a Digital Service Provider by 2020 from a telco as conventional services are being commoditized and becoming dumb pipes. Executed well, this may lead to first mover advantage.

• DiGi-X, a newly formed division helmed by Praveen Rajan as Chief Digital Officer, is tasked for constructing digitally adjacent businesses and competencies, firmly positioning DiGi in the rapidly growing digital arena.

• DiGi-X is mandated to create standalone digital businesses, develop new business streams through acquisition and investments, deepen digital partnerships and footprint in the startup ecosystem, as well as build and monetize digital platforms for the core business.

• Digital initiatives include digitizing call centre communication, cloud based infrastructure (SDN - software defined networks / NFV - network function virtualization), targeted advertising (Tapad), online classified (mudah.my), remittance (Prabhu), data storage, etc.

• In a recent interview, CEO Sigve Brekke commented that Telenor was built on competition. With the fighting spirit, price war is not a concern as DiGi is a sustainable and long term player.

• He also opined that Malaysia is not big enough for more than 3 players, causing infrastructure duplication which is a waste of resources. Prolonged, this may eventually lead to consolidations, in line with HLIB’s view.

• With the latest reallocation, DiGi is thankful but not satisfied and eyeing for more, especially the priced 700MHz. DiGi’s under-leverage balance sheet can support future reallocation / auction comfortably.

• At 4.4%, DiGi still the highest dividend yielder among the telcos.

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 - 13 Jun 2016