Period     1Q13

Actual vs. Expectations     Digi’s 1Q13 NP of RM329m (+2.5% YoY) came in below expectation and accounted for 20.1% of ours and 18.7% of the consensus full-year earnings estimate, respectively. The main culprits were the: 1) higher handset related expenses due to a stronger handset sale number; 2) higher accelerated depreciation costs of RM91m (vs. our RM50m estimate) although the full-year guidance remains unchanged at RM150m and 3) seasonality factor.

Dividends     It declared a first interim NDPS of 3.8 sen (ex-date: 7 May), which translates into a 90% payout ratio.

Key Result Highlights     YoY, Digi’s 1Q13 revenue rose by 4.9%, driven by the increased data usage and higher sales of smart devices. The NP, however, was lower by 2.5% due to a lower EBITDA margin as a result of the competitive IDD pricing and higher handset sales. The higher effective tax rate of 22.5% (vs. 21.0% a year ago) also weighed down the group’s performance.

QoQ, the revenue was up by 1.1% to RM1.65b on the back of higher devices sales revenue (RM171m vs. RM137m in 4Q12). The total cost base rose by 3.3% to RM936m, no thanks to the higher handset and traffic-related expenses. The NP, however, surged by 34% as a result of a lower effective tax rate of 22.5% (vs. 31.7% in 4Q12, which was then due mainly to the reversal of the prior quarters’ broadband network-related tax incentives).

Digi’s 1Q13 EBITDA margin, meanwhile, fell to 43.7% (4Q12: 44.5%) as a result of IDD margin pressure and a higher handset subsidy.

The group’s subscribers recorded its first (since 4Q06) negative net adds of -122k in 1Q13 (4Q12: +190k) as a result of the -129k users loss in the prepaid segment. Both the Prepaid and Postpaid ARPU were lowered by RM1 each to RM40 and RM82 respectively as compared to the 4Q12.

Data revenue accounted for 33.7% (3Q12: 32.7%) of Digi’s service revenue, which stood at RM1.48b. Smartphone users accounted for 28.5% (4Q12: 26.4%) of its total 10.4m subscriber base.

Outlook     Digi reiterated its FY13 earnings guidance of: 1) a 5%-7% rise in revenue and 2) its EBITDA margin to be sustained at FY12 level.

Change to Forecasts     We have lowered our FY13 and FY14 NPs by -4.6% and -0.3%, respectively, after raising our cost of material assumption.

Rating     Maintain OUTPERFORM

Valuation     Our TP has been raised to RM5.60 (from RM5.30 previously) after rolling over our valuation base year to FY14 with a targeted EV/forward EBITDA of 13.6x (+1.5SD).

Risks    Intensifying competitions.

Source: Kenanga