We attended Digi’s Analyst Day and came away feeling indifferent to the group’s earnings outlook. Management expects further growth in its internet & digital revenue and sees opportunities in the SME and home fiber segments. The group is making calculated investments to grow these businesses. Digi’s relatively prudent strategy should help minimize upfront costs (and risks) but it may lag its competitors in market share gains. All in, we maintain our earnings forecasts, HOLD rating and DCF-derived TP of RM4.55. At 25x 2020E PER, Digi shares trade at their past-5-year average PER, which looks fair.

Focus on Sustainable Internet Growth, Digitisation and Simplification

Service revenue from the non-internet segment has declined by 21% yoy in 9M19 due to a shift in consumer trends and lower interconnect rate revisions. The internet & digital segment now accounts for 63% of Digi’s 9M19 service revenue (Fig 1). To drive the mobile internet business, Digi offers on-demand internet passes, segment-focused offers, borderless roaming and family, personalised Box of Surprise and entry level device and phone programs. Its top digital products & services are MyDigi (3.6m monthly active users), EasyAdd (manage entertainment and lifestyle subscriptions) and Republic GG (gaming credits reload service).

B2B as An Engine for Growth, Digital Solution for B2B

Digi has also identified the SME segment as an engine for growth. Digi has launched several digital solutions for the SME segment, including OMNI (virtual PBX for SMEs), iFleet (vehicle tracking & management) and altHR (Digital HR solution). For now, revenue contribution from the Enterprise / SME segment is still small, but we expect Digi to actively grow this business segment in 2020-21.

Network initiatives, fibre capabilities through industry collaborations

Digi’s 4G network has 90% population coverage and its 4G+ network covers 70% of Malaysia’s population. The group focuses on data-driven analysis to help deploy its network according to customer needs. With a broad population coverage, Digi now places greater emphasis on expansion of 4G areas and on improving quality and efficiency of existing sites. On its fibre network, management aims to deliver fibre capabilities through industry collaborations – Digi shares some backhaul fibre network with Celcom and collaborates with TM Global on the inter-region submarine cable system and mobile backhaul. Management is taking a “gradual and phased approach” to grow its home broadband business.

We Walked Away Feeling Indifferent on Digi’s Earnings Outlook

We walked away from the Analyst Day with better insights on Digi’s plans and strategies but feel indifferent to its immediate earnings outlook. We are neutral on Digi’s expansion strategies – the group’s relatively prudent expansion strategies should help minimize upfront costs and lower business risks, but Digi may lag its competitors in market share gains. Overall, Digi’s prudent expansion approach should help to maintain its 2020-21E profit margins and dividend payout, which should bode well with investors seeking sustainable dividend yields.

Maintain HOLD With An Unchanged TP of RM4.55

We maintain our earnings forecasts, HOLD rating and DCF-derived 12- month price target of RM4.55. At 25x 2020E PER, Digi is now trading at its 5-year historical average PER, which looks fair. Key upside risk is stronger earnings delivery; downside risks are stronger competition and higherthan-expected prices for the upcoming spectrum awards in 2020.

Source: Affin Hwang Research - 29 Oct 2019