We attended Digi analysts’ briefing last Friday. The key highlights were its business strategies, market updates, spectrums' strategy, and digital transformation journey. Digi aims to remain focused on delivering core services and expedite its digital transformation to drive data monetisation as well as profitable growth. There is no change to our earnings forecasts post the company visit. We maintained our MARKET PERFORM call with unchanged TP of RM4.84, based on targeted FY17E EV/fwd EBITDA of 13.1x (representing -0.5x std. dev. below its 4- year mean).
Resilient 2Q16 service revenue supported by stronger subscriber base. Digi delivered a steady service revenue (-0.2% QoQ, -2.0% YoY to RM1.56b; 1H16: -1.9% YoY to RM3.1b), which has improved sequentially amid challenging and taxing market conditions through aggressive high-speed data quotas, bundling and heavy discounts on the back of increased pressure on consumer wallets. The resilience performance was supported by stronger subscriber growth momentum fuelled by relentless customer focus, competitive offerings, wider selection of relevant digital services as well as nationwide 4G LTE roadshows with affordable device bundles.
Commitment to deliver Best for Internet network. The rapid network deployment has led Digi to continue to support growing digital demand. Digi’s 4G LTE/LTE-A population coverage had widened to 76%/34%, respectively, supported by over 6.5k LTE sites and 7k km of fiber network in 2Q16. Moving forward, management intends to accelerate its site fiberisation with more than 10k km of fiber network by 2018.
2H16 strategies. Despite market challenges likely to persist into 2H16, Digi is set to sail through the challenging wave by focusing on delivering core services and expedite digital transformation. Besides strengthening operational efficiency to drive resilient performance moving forward, the group will continue to grow its digital capabilities and set to become customers’ favourite partner under the digital life while unlocking growth opportunities from post-paid and digital services.
Spectrum updates. While the upfront spectrum fees for the allocated 900MHz and 1800MHz band have yet to be announced by the regulator, Digi believes the fee structure will be rational and may likely be staggered equally (after paying the upfront charges). This is to allow operators continued robust infrastructure and technology investments in order to drive Internet adoption and usage further to achieve MCMC’s ambition of 95% broadband penetration by 2020. Meanwhile, the group is also hoping to receive a fair and balanced spectrums allocation on the remaining 2600MHz, 2300Mhz, 2100MHz, and 700MHz bands, which licenses are set to expire in 2017/18. Of which, management wishes to receive at least 2x10Mhz in the 700MHz band, which could allow the carrier to provide seamless nationwide 4G experience, especially to the rural areas.
Capitalise on digital services' opportunities. The industry service revenue has been adversely affected by aggressive competition and continued weak consumer sentiment. As a result, management believes there is a need to reposition from a traditional branding, especially the prepaid division, to address all different segments in the market. The group is set to introduce more digital services that cater to customers’ evolving needs and digital lifestyle as well as drive differentiation through strategic business themes, cross networking, products & services, and channels.
Go beyond Telco. Digi shared more colours on its newly setup Digi-X division, which is mandated to create a standalone digital business beyond its traditional telco realm, in addition to fuelling innovation as well as build and monetise digital platforms for the core business. Through investing in the start-up ecosystem, Digi believes it could create new digital services that not only serve the core but could also graduate them into new venture beyond telco.
Source: Kenanga Research - 25 Jul 2016
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