News

Digi confirmed that it has been allocated 2x5 MHz (from 2x2 MHz previously) of 900MHz and 2x20 MHz (from 2x25 MHz) of 1800MHz band for 15 years with full implementation starting 1st July 2017.

The company notes the importance of taking a holistic view on spectrum and welcomes the timely review of the 700MHz, 2300MHz and 2600MHz bands by the end of 2016, as having a fair and balanced portfolio is crucial to delivering affordable and quality internet services to meet growing demand.

Comments

We are POSITIVE on the latest spectrum allocation to Digi as the much-needed additional 900MHz band will not only enhance the group’s network coverage but also improve its quality (i.e. to address/partially eliminate its poor in-door signal penetration issue) moving forward. We believe the additional 900MHz band would allow the group to optimise its future capex plan further as it requires lesser capex to enhance its network coverage (especially in the rural areas). Indeed, management has been keeping no secret in eyeing the additional 900MHz band for more than a decade.

On the 1800MHz spectrum front, despite Digi’s allocation being narrowed by 10MHz (similar to its rival – Maxis), it may not pose a great challenge to the group in view of its vast experience in managing spectrum portfolio.

Meanwhile, we also do not discount that the industry players could apply a change in spectrum usage (i.e. to deploy 4G services under the 900MHz and etc.). This, if approved by the authority, will allow the incumbents to optimise their spectrum portfolio further.

Outlook

Competition is expected to remain intense in view of the stronger competition from U Mobile. Similar to Digi, we believe U Mobile could be allocated a comparable spectrum under the 900MHz and 1800MHz bands, which could pose a great challenge to the industry’s incumbents moving forward.

Forecast

We leave our FY15/16E earnings unchanged for now pending the upcoming 4Q15 results review.

Rating

Upgraded to OUTPERFORM

Valuation

Raised TP to RM5.45, based on a higher targeted FY16 EV/fwd. EBITDA of 13.0x, representing an average 4-year’s mean (vs. 12.3x previously, which implied -0.5x SD below its 4-year’s mean). Although the upfront Spectrum Assignment fee is yet to be confirmed, we believe the latest spectrum allocation (in both the 900MHz and 1800MHz bands) to Digi could eliminate some investors’ concern and provide a short-term positive catalyst to the group.

Risksto Our Call

Intensifying competition.

Source: Kenanga Research - 3 Feb 2016