We attended Digi briefing yesterday, where management officially introduced its new CEO, Mr. Lars-Ake Norling, and provided company updates to the investment community. The group reiterated its top-line and EBITDA guidance for 2014 despite a challenging industry revenue growth outlook. Management believes there are rooms for growth in the data and internet revenue in view of the current low penetration rate. Digi will continue to focus on delivering best internet network and products to drive strong internet uptake and usage. Post-briefing, there is no change to our earnings forecasts. We maintained our MARKET PERFORM call on Digi with an unchanged target price at RM5.53, based on a targeted FY15 EV/forward EBITDA of 13.4x, representing a 1.0x standard deviation above the 4-year mean.
Strong stewardship. Digi’s new CEO, Lars-Ake Norling, has took over the group’s driver seat since 1st August. Before this appointment, Norling was the CEO of Telenor Sweden since April 2009 and had led the group to deliver robust financial results. Telenor Sweden has built an attractive internet proposition, with both mobile and fixed offerings, in a highly competitive marketplace and is the second largest operator in the country with 2.5m mobile subscriptions, 0.7m fixed broadband subscriptions, and close to 1.8k employees.
Paving the way to deliver 2014 guidance. Digi is expected to stay ahead amidst sluggish industry revenue growth outlook to deliver 4%-6% revenue growth in FY14, albeit there is a possibility of meeting the lower end of its guidance. The decent targeted revenue growth was mainly underpinned by solid execution of marketing strategies as well as higher data revenue. The group’s EBITDA margin, meanwhile, is expected to be sustainable at 2013 level (~45%) as a result of the continuous operational efficiency.
Rooms to expand data revenue. Digi believes there are still plenty of opportunities to raise its data revenue through subscription, and/or increase usage methods. The former approach is to lure subscribers through continued high-speed data coverage expansion as well as providing both multi SIM and devices services. The latter approach, meanwhile, is to improve usage through advancement of digital services and introduce more innovative as well as targeted group packages to entice more regular internet usage. With the current low penetration rate in both the smartphone (2Q14: 41.9%) and mobile internet (39.2%), coupled with a right pricing structure, management is confident in providing relentless best customer experience and drive data revenue higher moving forward. Note that, the group’s data revenue has improved to RM1.1b (15.4% YoY) in the 1H14 which accounted for 37.4% of the total service revenue.
Encouraging mobile Internet demand. Digi’s mobile Internet revenue has been on the uptrend and recorded 39.6% YoY growth to RM409m in 2Q14 through the empowering of customers’ relevant selection of Internet package. For the high-end users, Digi has provided relentless new cutting-edge services while giving early adopters relevant reasons to use the Internet. For the entry-level users, management has started to provide various basic Internet services (i.e. RM1/day for YOUTUBE) to lure users. Moving forward, Digi believes the success factor to drive mobile Internet demand further will require solid execution across pricing, devices, partnerships and network coverage. Capturing the next wave of growth will require a segmented approach and rapid innovation in digital services to stimulate Internet usage. As of end-2Q14, Digi has recorded 66% internet penetration rate in the postpaid segment with 34% in the prepaid division.
Source: Kenanga
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