DiGi.Com; Hold; RM4.66
Price Target: RM4.95; DIGI MK

DiGi.Com held an analyst get-together to meet its new CFO Karl Erik Broten, who was previously attached to Telenor Pakistan and Telenor Hungary. Some key points we noted from the meeting were:

a) Cost management for DiGi remains an ongoing process, with potential for cost savings in terms of operations & maintenance expenses when its network modernisation is complete (discontinuing its legacy network) though this may be more opaque as 3G coverage expands. Infrastructure sharing and joint fibre buildings to minimise network operating costs and backhaul & transmission costs are also a recurring theme. What is new is a concerted effort from Telenor group to streamline its operations between its different operating companies through sharing of non-core services such as IT, customer service and HR. However, the full brunt of this would likely only be realised in the medium term.

b) Management has highlighted the importance of the prepaid segment and its capacity for further revenue translation in terms of driving mobile data usage. Migrants, which comprise a sizeable portion of DiGi’s prepaid subscription base, are also beginning to utilise data buckets.

c) Competition will continue to be heated, especially with the impending arrival of another MVNO from PT Telekomunikasi Indonesia (in collaboration with Maxis). However, we think DiGi’s strong brand awareness and well-placed distribution points would allow it to defend its strongholds in the Indonesian migrant market.

d) Expect 4G LTE on the 1800MHz band to be utilised in 2014. Trial sessions are currently ongoing, though full commercial rollout would require further optimisation due to DiGi’s lack of 900Mhz spectrum to offload 2G and 3G traffic to.

e) DiGi is actively working on acquiring more lower-band spectrum, whether via purchase or on a leased basis. We think there may be some challenge here, due to the lack of spectrum on sale in the market currently, though it is also communicating with the regulator on coming to a solution.

f) Main priorities for the operator are currently to fully complete and iron out kinks in its network modernisation, as well as drive 3G coverage expansion, which is expected to hit at least 75% by end-2013.

g) DiGi is also expanding its tablet range to include low-to-medium-end tablets, much like its new strategy to offer medium-priced handsets in order to drive tablet usage as well as promote its 4G LTE tablet offerings.

h) Expect 2H13 to register stronger growth than 1H13, premised on a lower base from 2H12 (network issues resulted in muted earnings), greater data usage from existing mobile subscriptions and subscriber gains as 3G coverage ramps up.

We think DiGi still offers high potential for higher-than-industry growth, both as a function of coverage upside as well as cost savings from its various initiatives. In terms of transitioning to a business trust, specific guidelines related to areas such as operational, tax and regulatory effects on the operator are still vague, though a decision would be made by end-2013. The company is still one of the cheapest in the Malaysian telecoms sector from a P/E standpoint as well as possesses a clean balance sheet. We maintain our HOLD call and RM4.95 price target.

Source: HwangDBS Research - 16 Aug 2013