We attended Digi analysts’ briefing yesterday. The key highlights were its backhaul, network quality, and business strategies. The group also introduced its senior management team as well as elaborated on their respective roles and experiences. Following the completion of its network modernisation plan, Digi currently posses a much stronger network and wider coverage, which allow the group to further tap into underserved areas/markets, going forward. Increased internet-based subscriptions and usage will continue to be the group’s key focus in FY14. Post-visit, there are no changes to our Digi FY14 and FY15 earnings forecasts. We reiterate our OUTPERFORM call on Digi with an unchanged target price of RM5.24, based on a targeted FY14 EV/forward EBITDA of 12.8x (+1.0x SD).

Stronger backhaul. Digi is now positioned on a much stronger backhaul after the completion of the network modernisation plan in 3Q13. The group has established more than 6,200 sites for its 2G voice and data services, which covers 93% of population coverage with an aim to further expand coverage areas to more than 6,650 sites by end-CY14. Digi’s 3G/HSPA+ services, meanwhile, have been successfully launched in more than 4,850 sites with 80.1% (vs. 67% in FY12) population coverage as of end-CY13. We understand that the group is targeting to achieve at least 86% population coverage by end-CY14. LTE expansion will progress faster in 2014 with an aim to further widen its LTE service to more than 1,000 sites by end-FY14 and covering high data usage areas. Meanwhile, the group’s fibre network will also be further strengthened following the recent tripartite agreement signed with both Telekom Malaysia and Celcom to roll out >10,000 km (from the current >3,000 km) of fibre network nationwide over a three-year period.

Growth strategies. With the current much stronger backhaul, Digi plans to create more public awareness of its improved network quality as well as tapping the underserved areas/markets (i.e. inactive coverage zones, rural areas, high-end post-paid customer segment and etc.). Increased internet based subscriptions and usage will continue to be the group’s key focus in FY14. We understand that several marketing campaigns and strategies are already in the pipe-line to encourage internet take-up, especially amongst the existing prepaid subscribers. The group also believes that affordable smartphones and tablets will continue to bring a positive spin to higher internet adoption. ARPU-wise, management will continue to emphasize uplifting the overall ARPU through bundled value services, instead of segregated services and individual targeting in each sub-segments (i.e. Voice, SMS and Data). Management believes that a solid distribution network and relevant products offerings could anchor consistent ARPU development and growth.

Challenges and opportunities. Apart of the usual industry competition, management sees fair access to strategic assets (i.e. spectrums) and regulatory uncertainty (i.e. accounting separation issue) will be the key challenges in FY14. Having said that, Digi believes the current stronger backhaul and improved network quality could provide potential growth opportunities to the group. Meanwhile, Digi also intends to capture and monetise data growth (i.e. launching data pricing plan and etc.) as well as leverage on digital services and partnerships.

Business trust (BT) unlikely to materialise in the near-term. Digi is still in the midst of ironing out the details to ensure that all aspects of the structure are considered and is not in a hurry to conclude the plan given the complexity of the investment structure. No timeframe was provided as expected. Meanwhile, management reiterated its commitment to optimise shareholders’ returns and increase capital efficiency in a sustain manner. Besides BT, we also understand that the group is also exploring other options to optimise its shareholders’ return.

Source: Kenanga