Period

1Q15

Actual vs. Expectations

1Q15 core NP of RM479m (-1.2% YoY) came in within expectations, accounting for 23.9% of our full-year estimate and 22.9% of the consensus.

Overall, the 1Q15 performance was mainly driven by strong demand for smartphone bundles from both postpaid and prepaid segments, but this was partially offset by lower EBITDA margin (as a result of higher device sales and weaker MYR), higher depreciation, and absence of prior year tax benefits. Note that, Digi’s 1Q15 EBITDA margin would be 0.8% higher (to 46.1%) if normalised against forex loss for the quarter.

Dividends

It declared a first NDPS of 6.1 sen (ex-date: 13 May), which translates into a 99% payout ratio. For the full financial year, we expect DIGI to declare 25.8 sen. Key Result

Highlights

YoY, 1Q15 revenue climbed 4.3% to RM1.8b, fuelled by stronger service revenue (+2.2% to RM1.6b) and higher device & other revenue (23.8% to RM203m). Its EBITDA margin, however, was lower by 200bps to 43.3%, no thanks to higher device sales (which consist of lower margin) and weaker RM. The group’s NP, meanwhile, declined by 1.2% to RM479m as a result of the lower EBITDA margin and absence of tax incentives.

QoQ, 1Q15 revenue was lower by 0.4% due mainly to seasonal factor. Its COGS climbed 7.2% led by increase in demand for smartphone bundles, compounded by effects from weaker RM while OPEX softened by 2.1% as a result of lower staff costs and other expenses. NP, meanwhile, dipped by 14.6% to RM479m due to lower EBITDA margin (43.3% vs. 44.5%) and absence of tax incentives.

Digi’s total subscriber base added 270k net adds in 1Q15 (to 11.7m), supported by both prepaid (+233k) and postpaid (+37k) subscribers mainly underpinned by the stronger network infrastructure, wider coverage, as well as easy access to a wide range of affordable smartphones bundles. Its blended ARPU remained steady at RM46 with close to 32.6% ARPU contributed by internet.

Data revenue accounted for 42.3% (4Q14: 40.2%) of 1Q15 total service revenue, thanks to the sustained higher smartphone (53.2%) and Internet (56.7%) penetration rates.

Outlook

DIGI is maintaining its FY15 earnings guidance, where the group is targeting to deliver a low-mid single digit revenue growth, together with a sustainable EBITDA margin which is similar to FY14 level (~45%).

Change to Forecasts

Marginally raise our FY15E-FY16E NPs by 0.1% each after fine-tuning.

Rating

Maintained OUTPERFORM (due to the potential total upside of 15.2% (11% capital upside & 4.2% yield)).

Valuation

Maintained our TP at RM6.87 based on unchanged targeted FY15E EV/forward EBITDA of 16.5x, representing a 2.0x standard deviation above the 4-year mean. We believe Digi deserves a higher valuation compared to its peers for its higher operational efficiency and better competency in monetising data.

Risks to Our Call

Intensifying competition.

Source: Kenanga Research - 28 Apr 2015