Digi is still continuing to explore the business trust model but is not committing to a timeline. The group has modified its business model to a mixture of both airtime rebate and handset subsidy (depending on the subscriber’s monthly commitment plan) to capture the market which had been previously overlooked under its old business model. Digi is expecting its EBITDA margin to normalise in the 2Q & 3Q before improving further in the last quarter to achieve its full-year target of c.46%. Meanwhile, more opex savings will also likely be seen from the year 2015 onwards under its network collaboration with Celcom when both the parties completed the building of their joint 6,000km fibre cable. There are no changes to our Digi FY13-FY15 earnings forecasts. We are maintaining our OUTPERFORM call on Digi with an unchanged target price of RM5.60, based on a targeted FY14 EV/forward EBITDA of 13.6x (+1.5 SD). 

Continues to explore business trust (“BT”). In view of the various forms of BT proposals tabled by the investment banks, Digi is still exploring the best framework to house its assets and extract more cash from its free cash flow to further reward shareholders. At present, Digi indicated that it is not intending to list the BT outside Malaysia should the framework materialise. Meanwhile, we understand that Digi has an optimal capital structure ratio of 1.5x-2.0x its net debt/EBITDA. Should the company decide to further reward shareholders and leverage these levels, we estimated that Digi could potentially unlock a further RM0.54-RM0.73/share.   

Modifies its business model. Digi has shifted its business model that was previously focused on air-time rebate (for Iphone users) and handset subsidy (for Android users) to a mixture of both that is segregated by the monthly commitment fee. Digi will subsidise the subscribers’ handsets if the monthly commitment is more than RM100 while giving an air-time rebate to the subscribers who below the threshold amount. The key rationale is to capture the market which had been previously overlooked under its old business model and to lure more subscribers to commit to the higher-end packages and subsequently improve its service revenue further.

EBITDA margin likely to normalise in the 2Q & 3Q before improving further in 4QFY13.  The group’s 1Q13 EBITDA margin was lower at 43.7% (vs. 4QFY12: 44.5% and 1QFY12: 47.0%) no thanks to the competitive IDD pricing and higher handset sale that were mainly boosted by the seasonality. Moving forward, Digi believes its margin will normalise to c.46% in the 2Q and 3Q as a result of higher service revenues, lower operating cost as well as softening handset sales. Moving on to 4QFY13, the group believes its margin will be improved by at least another 1% as a result of a lower network maintenance cost led mainly by the easing of parallel networks (from Huawei & ZTE to solely ZTE) and the completion of its network modernisation plan in the 3Q. Digi believes that its full-year EBITDA margin can be sustained at c.46%, similar to that recorded in FY12.

On course to save RM1.1b over 10 years under its network collaboration plan.  Digi started to see some opex savings in 1QFY13 under its network collaboration with Celcom. Although the savings are negligible for now, it expects them to rise gradually to an average annual saving of RM150m-250m after 2015 when both parties  complete the building of their aggregate 6,000km fibre cable from the North to the South in West Malaysia. To date, Digi has completed its Phase 1 of 1,000km jointfibre (50% each for both Digi and Celcom) aggregation and trunk rollout. We have yet to impute the above potential savings into our financial model.

Source: Kenanga