Digi believes its distribution strength and sturdy IT platform will continue to help the group sail through the intensifying competition in the prepaid segment. On the postpaid segment front, the group believes some growth opportunities may emerge as its 3G coverage gap (against its peers) is expected to be narrowed by end-FY14. Increased internet-based subscriptions and usage will continue to be the group’s key focus in FY14, where management intends to provide more affordable smartphone choices to spur internet usage. There is no change in our FY14-FY15 earning estimates. We maintained our MARKET PERFORM call on Digi with an unchanged target price at RM5.40, based on a targeted FY15 EV/forward EBITDA of 13.0x, representing a 1.0x standard deviation above the 3-year mean.

Sailing through the challenging wave in the prepaid segment. The recent revamped Maxis’ Hotlink, Hotlink 2-in-1 Data Plan, is offering similar features as Digi’s prepaid plans (that generally consist of discount call rate to favourite mobile numbers, free social messaging as well as Internet quota). While these features appear comparable, Digi believes its distribution strength, sturdy IT platform as well as billing system will continue to lead the company in gaining tractions in the current prepaid segment battle. Despite intensifying competition, Digi believes competition is at a rationale pace, and a price war is unlikely to break out.

Growth opportunities in the Postpaid segment. Digi’s network quality has strengthened significantly following the completion of the network modernisation plan. With the current much stronger backhaul, Digi is now capable in tapping the underserved areas/markets (i.e. inactive coverage zones, rural areas, high-end postpaid customer segment and etc.) Management believes some growth opportunities could be found in the postpaid segment given its 3G coverage is expected to hit 86% by end-FY14, narrowing the network coverage gap against its peers.

Affordable smartphones range gaining traction. The country’s premium/high-end smartphones market could have reached a saturation point judging from the current c.37% smartphone penetration rate as well as taking a cue from the less aggressive marketing campaigns (for premium smartphones) implemented by the mobile operators. Digi concurs with our view and believes the growth in data revenue moving forward will very much depend on the acceptance of the affordable smartphones as well as the internet adoption. Meanwhile, the group believes the demand of LTE service will only surge remarkably when LTE smartphones prices are lowered to below RM1k from the current c.RM2k. Digi is targeting to roll out 1,500 LTE sites in FY14, which implies about 10%-12% population coverage and will consider to monetarise the LTE service when the coverage surpasses 50%.

Business Trust (BT) updates. No solid development on BT as Digi is still assessing the structure from different aspects. Apart from promising to increase capital efficiency in a sustained manner, Digi is also taking the operational efficiency as well as competitiveness into the consideration. The group is also considering other avenues to optimise its under-leveraged balance sheet but reluctant to elaborate at this juncture.

Source: Kenanga