Period     2Q13/1H13

Actual vs. Expectations    Digi’s 1H13 NP of RM708m (+9.9% YoY) came in within ours but slightly below the street estimate. The result was accounted for 44.1% of ours and 41.2% of the consensus full-year earnings estimate.Overall, the 2Q13 performance was mainly fuelled by continuous improvements in network quality, larger 3G network footprint, and higher take-up rate in its mobile internet offerings.   

Dividends    It declared a second interim NDPS of 4.8 sen (exdate: 6 Aug), which translates into a 98% payout ratio, and bringing its total NDPS for the 1H13 to 8.6 sen (vs 11.8 sen in 1H12). 

Key Result Highlights    YoY, Digi’s 1H13 revenue rose by 4.8%, fuelled by increased data usage and higher sales of smart devices. The NP improved further by 9.9% due mainly to lower accelerated depreciation charges (RM137m vs RM267m in 1H12). 1H13 EBITDA margin was lower at 44.5% (vs 47.3% a year ago) as a result of the competitive IDD pricing and higher handset related sales.  

QoQ, the group’s 2Q13 revenue inched up by 0.4% to RM1.65b on continuous growth in the service revenue (+3.4%) due to higher mobile internet revenue (+10.6%). The NP, however, surged by 15.6% to RM380m on the back of improved EBITDA and lower accelerated depreciation charges (RM46m vs RM91m in 1Q13). 

Digi’s 2Q13 EBITDA margin, meanwhile, improved to 45.2% from 43.7% in the prior quarter, mainly supported by stronger service revenue and flat OPEX.     

The group’s subscriber base also managed to regain its growth momentum and recorded a total net adds of 176k (1Q13: 122k), which comprised of +168k and +8k in the Prepaid and Postpaid segments, respectively. The Prepaid and Postpaid ARPUs were up by RM2 and RM1 to RM42 and RM83, respectively, as compared to the prior quarter. 

Data revenue accounted for 30.5% (1Q13: 30.2%) of Digi’s 2Q13 total revenue. Smartphone users accounted for 30.4% (1Q13: 28.5%) of its total 10.5m subscriber base.

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

Change to Forecasts   Lowered our FY13 NP by -0.8% but raise FY14 estimate by +0.4%, after fine-tuning. 

Rating  Maintain OUTPERFORM rating. 

Valuation     Our TP remains unchanged at RM5.24 based on a targeted FY14 EV/forward EBITDA of 12.7x (+1.0SD). 

Risks    Intensifying competition.

Key takeaways from results conference 

Targeted to conclude business trust reviewing process by year-end.  Digi is still exploring the best business trust framework to house its assets and further reward its shareholders. Although the group continues to remain silence on its reviewing process, it has indicated that the whole  process will probably be completed by end of this year. Digi will seek shareholders’ approval on this corporate exercise.

Improved network quality.  The group’s network modernisation plan, started in  December 2011, has seen the successful upgrading of more than 4.7k sites in 2Q13, representing 85% of the sites swapped and modernised. The group also made a steady progress on its joint built fibre (with Celcom Axiata) with completion of combined 1,012km. In  terms of population coverage, the group’s 3G coverage has expanded to 71.6% from 68.1% in 1Q13. We understand that Digi is targeting to complete its network modernisation program by the end of 3Q13 with an aim to increase its 3G coverage to 80% by end-2013. 

4G-LTE plan. Digi has launched its 4G LTE plan on 5th July in selected high-traffic locations in the Klang Valley. The group plans to expand its coverage nationwide gradually with an immediate aim to cover 1,500 sites (or about 20% population coverage) by end 2014 and reaching 50% population coverage by 2017. Management intends to use both its 1.8GHz and 2.6GHz spectrums to deploy the 4G-LTE services and leverage on Telenor Group’s LTE deployment experience in 6 markets globally. The estimated investment on LTE network will be approximately RM650m in the first 3 years. 

Source: Kenanga