Period  2Q14/1H14

Actual vs. Expectations DIGI’s 1H14 NP of RM984m (+39% YoY) came in within expectations, accounting for 51.6% of our forecast as well as the street’s full-year estimate.

 The higher 1H14 performance was mainly driven by higher usage of mobile internet services; synergies from stronger network infrastructure and lower depreciation charges.

Dividends  It declared a second interim tax exempt (single-tier) dividend of 6.4 sen (ex-date: 5 August), which translates into a 99.7% payout ratio. For the full financial year, we expect DIGI to declare 25.0 sen NDPS.

Key Result Highlights

 YoY, 2Q14 revenue improved by 5.6% to RM1.75b, fuelled by stronger service revenue (+2.8% to RM1.57b) and higher device as well as other revenue (+40% to RM178m). Its EBITDA margin, meanwhile, improved by 30bps to 45.5%, in line with management guidance. The Group NP, however, soared by 31% to RM499m due mainly to stronger service revenue, efficient cost structure, as well as lower depreciation charges.

 QoQ, 2Q14 revenue climbed by 1.7%, thanks to the higher service revenue as a result of a better voice, data and mobile internet contribution. Its COGS was up by 1.9% to RM524m while its OPEX remained relatively flat at RM433m. The efficient cost structure (24.5% to revenue vs. 24.8% in 1Q14) led the group to record higher EBITDA margin of 45.5% in 2Q14 (1Q04: 45.3%).

 Digi’s total subscriber base added 18k net adds (3.4% YoY or 0.2% QoQ) to 10.9m in 2Q14, reversing earlier 1Q14’s negative net adds trend. The stronger base was mainly supported by both prepaid (+8k) and postpaid (+10k). The former was mainly induced by targeted internet campaigns and affordable smartphone bundles while the stronger postpaid subscriber base was led by mass subscriptions from the revitalised postpaid SmartPlans. Prepaid ARPU was flat at RM41 while Postpaid ARPU inched RM2 to RM83.

 Data revenue accounted for 38% (1Q14: 37%) of 2Q14 total service revenue of RM1.75b, thanks to the sustained higher internet and smartphone penetration which climb c.3pp QoQ each to 39.2% and 41.9%, respectively.

Outlook  Digi is maintaining its FY14 earnings guidance, where the group is targeting to deliver 4%-6% revenue growth with a sustainable EBITDA margin that similar to FY13 level (~45%).

Change to Forecasts

 Raised our FY14E and FY15E NPs by 2.5% and 1.4%, after fine-tuning and raised our postpaid ARPU as well as device sales assumptions.

Rating Maintained MARKET PERFORM

Valuation  Our TP is raised to RM5.53 (from RM5.40 previously) based on a targeted FY15 EV/forward EBITDA of 13.4x (from 13.0x previously), representing a 1.0x standard deviation above the 4-year mean.

Risks to Our Call Intensifying competition.

Source: Kenanga