Period  3Q14/9M14

Actual vs. Expectations Digi’s 9M14 NP of RM1.47b (+27% YoY) came in within expectations; accounting for 75.3% of our forecast as well as 75.0% of the street’s full-year estimate.

 Higher usage of mobile internet services, synergies from stronger network infrastructure and lower depreciation charges were the main growth driver in 9M14.

Dividends  It declared a third interim tax exempt (single-tier) dividend of 6.2 sen (ex-date: 5 November), which translates into a 99.0% payout ratio, bringing its 9M14 DPS to 18.8 sen (9M13: 14.3 sen). For the full financial year, we expect Digi to declare 25.0 sen.

Key Result Highlights

 YoY, 9M14 revenue improved by 4.4% to RM5.2b, fuelled by stronger service revenue (+3.3% to RM4.7b) and higher device sales as well as other revenue (+15.5% to RM514m). Its EBITDA margin, meanwhile, improved by 50bps to 45.2%, in line with management guidance. The Group NP, however, soared by 27.1% to RM1.47b due mainly to stronger service revenue, efficient cost structure, as well as lower depreciation charges.

 QoQ, 3Q14 revenue improved by 0.6%, thanks to the higher service revenue (+1%) as a result of a better voice, data and mobile internet contribution. Its COGS, however, was up by 2% to RM536m (due to higher traffic charges) while its OPEX was lower by 1% to RM428m, thanks to the better cost efficiency achieved (24.4% to revenue vs. 24.8% in 2Q14). EBITDA, meanwhile, was lowered marginally to RM789m (-0.8%) with a margin of 44.9% (vs. 2Q14: 45.5%).

 Digi’s total subscriber base added 442k net adds in 3Q14 (to 11.3m), supported by both prepaid (+440k) and postpaid (+2k) on the back of stronger network infrastructure. The former was mainly induced by targeted internet campaigns and affordable smartphone bundles, where Digi expects these subscribers to stay after the campaigns end, while the stronger postpaid subscriber base was mainly led by mass subscriptions from the revitalised postpaid SmartPlans. Prepaid ARPU was flat at RM41 while Postpaid ARPU dropped RM1 to RM83.

 Data revenue accounted for 39.6% (2Q14: 38.1%) of 3Q14 total service revenue, thanks to the sustained higher smartphone and internet penetration which climb c.4-5pp QoQ each to 47.0% and 53.0%, 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 similar to FY13 level (~45%).

Change to Forecasts Raised our FY14E and FY15E NPs by 0.4% each after fine-tuning.

Rating Maintained MARKET PERFORM

Valuation  Maintained our Digi target price at RM6.03 based on a targeted FY15 EV/forward EBITDA of 14.6x, representing a 1.5x standard deviation above the 4-year mean.

Risks to Our Call Intensifying competition.

Source: Kenanga