We attended Digi analysts’ briefing yesterday. The key highlights were its backhaul, competition landscape, network quality, and business strategies. Digi continues to believe that the current irrational price offers (for several mobile plans) are not sustainable but may still take a few months for industry players to achieve equilibrium price levels. While the industry’s mobile service revenue growth is being hotly contested, Digi plans to become the leading mobile Internet provider to sustain its performance with plans to accelerate its 4G-LTE network expansion to provide best Internet experience to the mass market and also to grow its postpaid business across consumer and business segments, while maintaining its leadership in prepaid. There is no change to our earnings forecasts post the company visit. We maintain our OUTPERFORM call on Digi with an unchanged target price of RM6.10, based on a targeted FY16 EV/Fwd EBITDA of 14.1x, representing a +1.0 standard deviation above the 4-year mean.

Finding equilibrium level. While the industry competitive intensity is expected to remain elevated in 2H15 on the back of weak consumer sentiment coupled with aggressive Internet pricing war and lucrative reload freebies, management believes that the current value-destructive plans are no sustainable as profitability will be the ultimate goal of all carriers. Having said that, Digi continues to believe that the industry may need a few more months to get to the equilibrium level.

Aiming for mobile Internet top spot. Digi is aiming to become the leading mobile Internet provider for the mass market to sustain its resilient performance as the industry’s service revenue growth appear to be challenging on heightened competition amid weak consumer sentiment. Side-stepping the current price war, Digi plans to grow its postpaid business across consumer and business segments, while maintaining its leadership in prepaid. On the postpaid segment, the group plans to win entry level as well as mid-to-high ARPU subscribers while growing its SME and SOHO segments through a solutions-driven portfolio. On the prepaid sector, Digi aims to maintain its leading position by growing mobile Internet adoption and usage.

Accelerate 4G-LTE network expansion. Following the completion of network modernisation programme and the launch of 4G-LTE services in 2013, the group has successfully expanded one third (c.2.3k) of its sites with 4G-LTE technology as of end-2Q15. The group has achieved LTE network coverage expansion to more than 65% across five key market centers (i.e. Klang Valley, Penang, Kuching, Johor Bahru, and Kota Kinabalu) or 35% nationwide population in 2Q15, backed by 5,600 km of fiber network. Moving forward, Digi plans to widen its fiber network to 6,000 km (with 50% LTE network coverage) by year-end and to be followed by additional 3,000 km one year later and reach 10,000 km in the year 2017. Strategy-wise, the group has implemented several approaches to drive 4G-LTE, which include: (i) free LTE uSim upgrade with additional 1GB quota, (ii) affordable LTE device bundle, and (iii) innovative digital services.

Efficient deployment of 4G-LTE technology for best Internet experience. Digi is leveraging on modernised equipment to deliver fastest growing 4G LTE network in all key market centers and aiming to expand its coverage to most of the major and sub-urban cities by 2017 (Figure 1 & 2). To further enhance its Internet experience, the group has started to prepare for 4G+, which include VoLTE, VoWiFi and LTE-A. While these technologies are currently at trial stages, we understand Digi is set to roll out these new services in 1H16 to further monetarise their data investment. Capex wise, Digi is maintaining its RM900m capex target in FY15 and believes its future capex/revenue ratio will likely come in at 11%-13% range, within its historical capex trend.

Source: Kenanga Research - 8 Sep 2015