Journey to Wealth
DiGi.Com - Earnings disappoint, valuations inflated SELL
- We downgrade DiGi to SELL (from HOLD) following the announcement of weak 3Q12 results yesterday, but we raise our fair value to RM4.60/share (from RM3.50/share) as we roll over our valuation base to FY13F (WACC: 9%).
- DiGi reported a core net profit of RM315mil for its 3Q12, bringing 9M12 earnings to RM960mil. This is broadly inline with our estimates, accounting for 71% of our FY13F earnings. The results, however, were well below consensus, accounting for just 61% of street's full-year earnings of RM1.58bil. Notably, this is the 2nd consecutive quarter that DiGi has missed consensus expectations.
- On a sequential basis, earnings were down 3% (revenue: +0.2% QoQ, EBITDA margins: -2.4pp QoQ) despite 3Q being a seasonally stronger quarter as DiGi was affected by prolonged post-swap optimisation ' voice revenues were negatively impacted. Estimated revenue impact for the quarter was RM40mil-RM50mil.
- On the prepaid side, margins were negatively impacted by the IDD segment (an area where Maxis is aggressively attempting to gain market share) as well as highly discounted sim packs offered by competitors. In the postpaid segment, management cautioned about higher handset subsidies by competitors to drive subs addition, but noted that this will vary by smartphone models and does not look like a trend, so far.
- A special dividend of 8 sen/share was announced on top of a 4 sen/share interim dividend. With the payment of the special dividend, DiGi has completed the entire cash payout from the 2 capital management initiatives announced previously.
- The adoption of a business trust structure may allow for a sustainable >100% payout ratio going forward. However, based on our projected FCF of RM1.9bil-RM2bil over the next 2 years, this translates into dividend yields of 4.5%-4.7% at the current price (and assuming DiGi pays out all of its FCF as dividends). Telenor's heavy funding requirements in India in the near-term suggest that a big chunk of DiGi's FCF might be paid out as dividends.
- While admittedly DiGi is a dividend paymaster (given excess cash) and is expected to post above-average revenue growth, our main concern is its excessively inflated valuation, amid increased earnings risk from an increasingly competitive operating environment. DiGi is trading at a 20%-30 premium to sector. Downward earnings revisions are key de-rating catalysts.
Source: AmeSecurities
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