Digi has accepted the letters of offer from the authority with regards to the 900MHz and 1800MHz spectrum assignments. Similar to its peer Maxis, Digi also settled its one-off spectrum fee of RM598.545m via existing borrowing facilities rather than opting for the staggered payment method. We have trimmed our FY16E/FY17E earnings marginally by 0.1%/1.2% after imputing higher finance cost. Maintained UNDERPERFORM with an unchanged TP of RM4.79, based on targeted FY17E EV/forward EBITDA of 12.8x, representing an unchanged -1.0x standard deviation below its 2-year mean). We believe there is room for the sector PER to de-rate, should incumbents start to lower dividend pay-out/payment to preserve cash for spectrums payment.

Accepted the letters of offer. Digi has accepted the letters of offer from the MCMC for the spectrum assignments of 2 x 5MHz of 900MHz and 2x 20MHz of 1800MHz for 15 years effective 1 July 2017. The said spectrums (especially the lower 900MHz bands) are expected to help Digi addressing the current relatively weak indoor signal issue as well as to provide greater geographic coverage from 2H17 onwards.

A lump-sum payment. Digi has decided to fund the one-time fee component of RM598.545m mainly through its existing borrowings facilities as opposed to the staggered payments, an alternative option suggested in the letter of offer. The additional borrowings incurred are expected to push its net debt-to-EBITDA ratio from 0.4x (as of end 3Q16) to c.1.0x by end FY16. While the latest net debt-to-EBITDA ratio has exceeded its early guided optimal capital structure level of 0.45x, management reckons it is still considered low if compared to the industry’s peers of 1.5x-2.0x range. Indeed, the group do not discount that the ratio could potentially go up to c.1.5x-2.0x range if additional funds are required to acquire/retain the remaining spectrum bands in the coming months.

900Mhz and 1800Mhz spectrums fee structure. To recap, the authority has announced the payment for spectrum in late August, which consists of: (i) a price component of RM598.545m for Digi (where players have the option to pay full settlement or higher amounts under staggered payment options), and (ii) fixed annual spectrum maintenance fee where Digi needs to fork out RM51.48m for upholding the spectrums. All in, Digi has to spend a total RM1.37b to use these two blocks of bandwidths for 15 years (effective from 1 July 2017).

Hope to receive a balanced spectrums band. The group is hoping to receive a balanced spectrums allocation on the remaining 2600MHz, 2300Mhz, 2100MHz, and 700MHz bands, which licenses are set to expire in 2017/18. Digi wishes to receive at least 2x10Mhz in the 700MHz band to equalise its current spectrum portfolio and allow the carrier to provide seamless nationwide 4G experience, especially to the rural areas.

Financial impact. We have trimmed our Digi’s FY16E/FY17E core PATAMI by 0.1%/1.2% after factoring in higher financing cost. The spectrum fee, meanwhile, is expected to be amortised through the spectrums’ useful life (i.e. 15 years, effective from 2H17 onwards). The group’s dividend, meanwhile, is expected to remain intact in view of its strong balance sheet. We estimated that the group will reward its shareholders through DPS of 21.6 sen (9M16: 16.1 sen) in FY16 and 21.9 sen a year later, implying a dividend yield of 4.3% and 4.4%, respectively

Source: Kenanga Research - 2 Nov 2016