Period  1Q14

Actual vs. Expectations  DIGI’s 1Q14 NP of RM485m (+48% YoY) came in within expectations, accounting for 25.6% of our fullyear estimate and 26.5% of the consensus.

 Overall, the 1Q14 performance was mainly driven by stronger boost in usage of mobile internet services and synergies from stronger network infrastructure.

Dividends  It declared a first NDPS of 6.2 sen (ex-date: 9 May), which translates into a 99.4% payout ratio. For the full financial year, we expect DIGI to declare 24.6 sen NDPS.

Key Result Highlights YoY, 1Q14 revenue climbed 4.3% to RM1.7b, fuelled by stronger service revenue (+5.3% to RM1.5b) but partially offset by lower device & other revenue (-4.1% to RM164m). Its EBITDA margin, meanwhile, improved by 160bps to 45.3%, in line with the management guidance. The group’s NP, however, soared by 48% to RM485m due mainly to stronger service revenue and improved cost structure.

 QoQ, 1Q14 revenue was lower by 0.9% due mainly to the seasonal factor. Its COGS was flat at RM514m while its OPEX climbed by 3.6% to RM436m as a result of the continuous network expansion impact on site rental, licenses and utilities expenses. The NP, meanwhile, dipped by 11.6% to RM485m due to lower EBITDA margin (45.3% vs. 46.7%) as a result of higher OPEX.

 Its total subscriber base was lower at 10.9m (as a result of seasonal effects on churn) with a negative net adds of 110k in 1Q14, which comprised 96k Prepaid and 14k Postpaid customers. Both the Prepaid and Postpaid ARPU were sustained at RM41 and RM83, respectively.

 Data revenue accounted for 37% (4Q13: 35%) of 1Q14 total service revenue of RM1.5b, mainly driven by higher smartphone penetration rate of 38.4% (+3.0pp QoQ).

Outlook  DIGI is maintaining its FY14 earnings guidance, where the group is targeting to deliver 4%-6%revenue growth, higher than the industry average of 4%, together with a sustainable EBITDA margin which is similar to FY13 level (~45%).

Change to Forecasts Raised our FY14E and FY15E NPs marginally by 0.6% and 1.0%, after fine-tuning and lower interest cost assumptions. We have also raised our FY14E capex assumption to RM896m (from RM835m previously) as per management latest guidance.

Rating Maintain MARKET PERFORM rating.

Valuation  Our TP is raised to RM5.40 based on a targeted FY14 EV/forward EBITDA of 13.0x (from 12.8x previously), representing a 1.0x standard deviation above the mean.

Risks to Our Call   Intensifying competition.

Source: Kenanga