Better cash efficiency is expected to be deployed under the upcoming Business Trust structure, although Digi has yet to conclude on the final structure. Digi expects revenue to continue climbing in 2014 while margin may face some pressures in the 1H but anticipated to normalise in the second half of the year. Its strategy, meanwhile, remain largely unchanged. On the other hand, Digi may consider outsourcing its back office services to further enhance its operational efficiency. There are no changes to our FY13 and FY14 earnings forecasts and we introduce our FY15E numbers. We also upgraded our Digi rating to OUTPERFORM with an unchanged target price of RM5.24, based on a targeted FY14 EV/forward EBITDA of 12.7x (+1.0x SD).

Business trust (BT) updates. In view of the upcoming business trust exercise which is a new and fairly complex structure, Digi is still in the midst of ironing out the kinks to ensure all aspects have been thoroughly considered before seeking shareholders’ approval. Management is committed to optimise shareholders’ returns and increase capital efficiency. Digi is currently in a solid financial position with low leverage of 0.3x net debt to EBITDA, which could allow the group to optimise its gearing to between 1.0x to 1.3x (or RM2.6b-RM3.6b based on our FY14 EBITDA forecast of RM3.0b which translates into 33-45 sen/share), if needed. While the BT structure has yet to be concluded, we understand that any excess cash being raised could be either used for future expansion and/or reward shareholders.

Top-line is expected continue to climb in 2014. While Digi has yet to unveil its 2014 guidance, the group hinted that the guidance should not be too far off from the current CY13 targets (5%-7% revenue growth; a 1pp dilution on EBITDA margin from CY12 level). Digi believes its topline will continue to grow, underpinned by: (i) higher data revenue (driven by better mobile internet adoption); and (ii) higher subscriber base as a result of the improved network quality. Meanwhile, Digi is also aiming to explore the M2M (machine-to-machine) potentials by levering on Telenor Group expertise with an aim to provide more e-related mobile services, which management believes will be a new growth area in the future. Margin-wise, Digi’s 1H14 margins are expected to face challenges, in view of the ongoing government subsidies rationalisation plan. Nevertheless, its margin is expected to be normalise in the 2H when the new billing system is launched which allows the group to provide more customised plans to cater for different subscribers’ needs.

Strategy remained largely unchanged. Digi will continue to grow its data revenue in 2014 and provide handset subsidy under the Prepaid segment. Nevertheless, its focus will be on the mid-to-low range devices and to further enhance its footprint in the corporate individual and SMEs market. On the Postpaid segment front, the group will rebrand its East Coast prepaid parcel label to “Digi” from “Happy” trademark currently given that the former has a much stronger brand name. Digi currently has a mere c.15% market share in the East Coast, thus suggesting more room to grow in the future.

Exploring share services model to further enhance operational efficiency. Digi may consider outsourcing its back-office services to further enhance its operational efficiency. Telenor had on July 2013 teamed up with a US-based company, Accenture, to accelerate the implementation of a global shared services platform across companies within the Telenor Group with an aim to drive quality and efficiency improvements across the business units.

Source: Kenanga