Highlights

• In the upcoming Shariah-compliant review by SC, there is a possibility that DiGi will be excluded from the list.
• Based on latest (FY16) audited account, DiGi’s conventional debt surged to RM2.3bn for spectrum fees payment.
• Recall that resulting from 900MHz and 1800MHz spectrum reallocation exercise, DiGi opted for one lump sum payment of the one-time fee component amounting to RM598.5m to MCMC on 1 Nov 2016.
• As a result, its conventional debt over asset ratio increased to 41%, surpassing the threshold of 33% by end of FY16.
• RM5bn Islamic bond facilities (sukuk) were established in 2Q17 to enhance funding flexibility to support the business and growth opportunities. Since then, the financial ratio has reverted to below the threshold at 30%.

Comments

• Without any exemption or special treatment, DiGi is likely to be excluded in the upcoming review for failing the ratio mentioned above.
• While this does not have any impact on the fundamentals of the company, the exclusion may exert some selling pressure on the stock.
• Even this materializes, we are confident that it will make a comeback into the list one year later as its debt position is already Shariah-compliant.
• Sharp share price correction may provide an opportunity for accumulation as DiGi is still the highest dividend yielding stock in the telco sector, with a decent above 4%.

Risks

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

Forecasts

• Unchanged.

Rating

HOLD ↔ , TP: RM4.50 ↔

• Still our favorite among the large cap telcos due to its under- leveraged balance sheet capable of supporting spectrum fee with steady dividend payout. Low frequency band would enhance its efficiency.

Valuation

• Maintain HOLD with unchanged DCF-derived TP of RM4.50. Our fair value is derived based on DCF with WACC of 6.0% and TG of 0.5%.

Source: Hong Leong Investment Bank Research - 16 Nov 2017