Main Bites FromCFO Luncheon
We maintain our NEUTRAL rating on Digi following theluncheon with its CFO. While Digi's execution track record speaks for itself,especially with the commendable quarterly showing vis-''-vis its peers, thetelco is showing signs of lethargy and could see greater earnings fallout froma re-energized Maxis. It also faces retained earnings constraints at the subsidiary level, which prevents the payout of special dividends and is not able tocapitalise on the share premium accountat the holdco level. The meeting did not prompt us to change our forecasts and we have not incorporated any special payout for FY13. OurFV stays at RM4.00 (7.5x FY13EV/EBITDA). TM and Axiata are the better picks for capital management upsidesurprises.
Going up against thegreen man. The takeaways from the luncheon meeting were: (i) risingcompetitive risks, and (ii) special dividends being a tall order. There were numerousqueries on Digi's response to theincreasingly aggressive Maxis, which hasjust launched its new Hotlink plan (Bagus) and cut IDD rates in an effort toarrest its market share decline. Digi also said special dividends will be achallenge for now as the RM691.9m (8.9 sen/share) share premium reserve at theholding company cannot be utilized sincethe cash can only come from its operating subsidiary, DigiTel, from which proceedsare up-streamed through retained earnings to pay dividends. We see downside risks to Digi'searnings arising from the more aggressive Maxis as the former has more to losein the segments that Maxis is apparently targeting ' migrant workers andvalue-conscious customers. Maxis had earlier said it is prepared to do anything possible to win back customers andrestore its market share, which had been incessantly chipped away by Digi,Celcom and to a lesser extent, U Mobile and Tune Talk. Also, wesense marketing lethargy with regard toDigi's acquisition and retention campaigns, which is a departure from thepast when it was a nimble operator and typically led the market. The company said it will monitor the competitive response before making any decision to retaliate as Maxis'packages and tariff adjustments were merely a 'normalization' of its legacy packages, which had been priced out of themarket.
LTE by 4Q2012. Digi said it can turn on LTE by4Q2012 should the company be awarded the 2.6GHz spectrum by the middleof the year. However, it does not intend to be aggressive with the rollout asLTE devices are still lacking. On the re-farming of the 900/1800Mhz spectrum,Digi offered very little updates (as with the other operators) althoughit is cautiously optimistic of procuringthe lucrative 900MHz band through an auction, to the detriment of its rivals.
Guidance maintained.Digi has reaffirmed its mid- to high single-digit revenue growth target forFY12, stable EBITDA margin and capex of RM700m-RM750m. Its network modernizationexercise is slated for completion by end-2012 but management said the