Period  4Q14/FY14

Actual vs. Expectations  Digi’s FY14 NP of RM2.03b (+19% YoY) came in within expectations; accounting for 103.8% of our, and 102.8% of the consensus full-year forecasts.

 Overall, the main growth driver in FY14 was mainly attributed to the higher usage of mobile internet services, synergies from stronger network infrastructure, lower depreciation charges and spillover of additional qualifying last mile tax incentives related to prior year.

Dividends  It declared a fourth interim NDPS of 7.2 sen (ex-date: 25- Feb), which translates into a 99% payout ratio, bringing its total full-year NDPS to 26.0 sen (vs. 21.3 sen in FY13).

Key Result Highlights  YoY, FY14 revenue improved by 4.2% to RM7.0b, fuelled by stronger service revenue (+3.3% to RM6.3b) and higher device sales as well as other revenue (+14.1% to RM686m). Opex to revenue ratio remained fairly stable at 25.2% (FY13: 24.9%) on the back of increasingly competitive market and rapid expansion of its data network footprints. Its EBITDA, meanwhile, improved 3.9% to RM3.1b while margin remained solid at 45.1%, as guided by management. The Group’s NP, however, soared by 19.1% to RM2.0b as a flow-through of stronger EBITDA, efficient depreciation subsequent to completion of network modernisation, as well as lower effective tax rate.

 QoQ, 4Q14 revenue improved by 2.4%, thanks to the higher service revenue (+3%) as a result of a better voice, data and mobile internet contribution. COGS was lowered by 2% led by savings from efficient traffic charges, although partially impacted by weaker MYR currency (which led to higher roaming cost) and higher smartphones costs. Its EBITDA, meanwhile, climbed marginally to RM801m (+1.6%) with a margin of 44.5% (vs. 3Q14: 44.9%).

 Digi’s total subscriber base added 76k net adds in 4Q14 (to 11.4m), supported by both prepaid (+53k) and postpaid (+23k) mainly underpinned by the stronger network infrastructure, wider coverage, various digital service innovations as well as easy access to a wide range of affordable smartphones bundles. Its blended ARPU remained steady at RM47 with close to 30% ARPU contributed by internet.

 Data revenue accounted for 40.2% (3Q14: 39.6%) of 4Q14 total service revenue, thanks to the sustained higher smartphone (49.3%) and internet (56.5%) penetration rate.

Outlook  DIGI is expecting to deliver low-to-mid service revenue growth in FY15, higher than the industry average of low single digit. Meanwhile, the group also expect its EBITDA margin to be sustained at FY14 level (~45%).

Change to Forecasts  Raised our FY15E NP by 0.8% after fine-tuning. Meanwhile, we also introduce our FY16E numbers where we expect Digi’s NP to hit RM2.1b (4% YoY) on the back of solid revenue growth and operational efficiency.

Rating Upgrade to OUTPERFORM (due to the potential total upside of 10.3% (6.3% capital upside & 4.0% yield)).

Valuation  Raised our TP to RM6.87 (from RM5.98 previously) after elevating our targeted FY15E EV/forward EBITDA to 16.5x (from 14.6x previously), representing a 2.0x standard deviation above the 4-year mean. We believe Digi deserves a higher valuation as opposed to its peers due to its higher operational efficiency, better competency in monetising data, as well as superior earnings growth among its peers.

Risks to Our Call  Intensifying competition. 

Source: Kenanga