Digi's  results  were  in  line  with  our  forecast  but  underperformed  street expectations as it ran into network challenges during the quarter which impeded its ability to grow voice revenue. This took us by surprise given Digi's solid trackrecord  of  operational  execution.  While  management  said  the  issues  are  behind, with  4Q12  revenue  on  the  mend,  we  suspect  subscriber  experience  may  have been  affected  which  could  hinder  stronger  revenue  recovery.  We  nonetheless raise our FV to RM5.00 (from RM4.07) after assuming a lower WACC of 9.0% (from 10.5%  previously),  reflecting  the  generous  dividend  and  capital  management prospects. Digi remains a NEUTRAL, trading at a rich premium to regional peers.   
 
Disappoints. Digi's annualized 9MFY12 core earnings/revenue were in line, at a 1%-2% deviation  from  our  forecasts.  Notwithstanding  the  seasonally  stronger  December quarter, the results fell short of market expectations by more than 15%. The group's EBITDA  margin  narrowed  for  the  second  consecutive  quarter  to  45.2%  in  3Q12 (1HFY12:  47%)  from:  i)  the  continuing  generous  handset  subsidy  to  boost  smartphone take-up  (24.5%  of  its  base),  ii)  extended  pressure  on  IDD  margins,  and  iii)  network challenges  faced  during  the  quarter.  Had  it  not  been  for  better  data  revenue  traction, overall  mobile  revenue  would  have  contracted  during  the  quarter  against  the  muted 0.2%  q-o-q  growth  (9MFY12:  +7.1%  y-o-y).  This  is  still  a  slowdown  from  the  0.7% registered in 2Q12 and 1.6% 1Q12.
 
Network swap hits voice capacity. Digi's mobile voice revenue contracted 1.4% q-o-q (-1%  y-o-y)  in  3Q12  as  it  was  unable  to  restore capacity  to  the  desired levels  from  the network  swap,  which  impeded  its  ability  to  grow  its  voice  revenue  streams. We  gather from management that IDD revenue remains under pressure as the re-pricing in tariffs is not  supported  by  higher  traffic,  resulting  in  weaker  margins.  We  think  mobile  revenue growth will remain under pressure as Maxis carves out a bigger slice of the IDD market.

12sen interim and special DPS. The payout ratio of 298% reflects the up-streaming of cash from DigiTel, approval of which was secured in September. With the latest payout, Digi has exhausted the capital distribution headroom from DigiTel (dividends payable on 7 Dec). We have assumed a dividend payout of 100% in our FY13 forecast. 

2013  guidance.  Management  has  issued  a  preliminary  guidance  for  2013  of  5%-7% revenue  growth  (target  to  outperform  market  growth  of  5%)  and  sustained  EBITDA margin  and cashflow,  which  is  not  far  from  its  maintained guidance  for  2012.  Capex  is guided  at  RM700m-RM750m.  Digi  believes  the  official  award  of  the  2.6GHz/4G spectrum  will  be  postponed  until  after  the  general  elections,  which  we  concur.  As  a result, we expect the commissioning of LTE services by operators to be slightly delayed.

Source: OSK