We walked away with a NEUTRAL view after attending Digi’s analysts briefing yesterday. Digi has secured an approval to raise up to RM5b through the Islamic financial market and has no intention to further reward shareholders via the above-mentioned financial instrument. Besides defending its core service revenue streams, Digi also intends to enhance its operational efficiencies via expediting digital transformation and leveraging on Telenor’s global scale. All in, we made no changes to our FY17/FY18E earnings estimates. Maintain MARKET PERFORM rating (in view of its Syariah compliance status and solid balance sheet) with an unchanged target price of RM4.74, based on targeted FY17E EV/forward EBITDA of 13.0x (representing an unchanged - 1.0x standard deviation below its 2-year mean).

Diversification of funding sources. Digi is set to leverage on its current strong company profile, which could allow the group to secure more cost efficient funding through the growing Islamic financial market. The group is aiming to issue sukuk programs in the coming months but has yet to determine the size as well as the interest rate. Meanwhile, the group also highlighted it has no intention to distribute dividends via leveraging on its financial and prefer to keep its net debt/EBITDA ratio at below 2.0x (vs. 0.6x as of end-FY16) in the next 3 years. To recap, Digi has secured approval to raise RM5b through via sukuk programs last week, which would be used for capex and working capital. The programs comprise of a 15-year Islamic medium term note (IMTN) of up to RM5b in nominal value and a 7-year Islamic commercial paper (ICP) of up to RM1b in nominal value. The combined limit is up to RM5b in nominal value where RAM has assigned AAA/Stable and P1 ratings for the IMTN/ICP programs, respectively.

Capitalise on new growth opportunities. Despite market condition remaining challenging in 2017, Digi aspires to turn in stronger performance than the industry through improved efficiencies and service revenue & EBITDA margin at around 2016 levels. The key priorities in FY17 will continue focusing on relentlessly growing postpaid and prepaid opportunities while defending core service revenue streams. The group intends to continue leveraging on its fiercer network to further strengthening its position in the consumer and enterprise postpaid segments while finding ways to stabilise and increase its profitability in the prepaid division. Besides, Digi will continue to grow its digital capabilities and set to become customers’ favourite partner for digital lifestyle. All in, we concur with the management’s view and believe the industry will continue to remain stagnant while waiting for the next growth opportunity to arise.

Striving more for efficiencies. Besides defending core telco revenue streams, Digi also plans to enhance its operational efficiencies via expediting digital transformation as well as efficient use of the strategic spectrum (i.e. 900Mhz band). The group is set to introduce more digital services in the coming months that cater to customers’ evolving needs and digital lifestyle as well as drive differentiation through strategic business themes, cross networking, products & services, and channels. Besides, management also plans to transform its network to the cloudbased model (which able to accommodate higher data capacities) and leverage on Telenor global scale on sourcing, infrastructure collaborations and talent. In short, Digi is aiming to achieve 1-3% p.a. operating cost reduction over the next 3 years. We had imputed some degree of operational efficiencies in our FY17/FY18E financial models.

Key risks to our earnings forecasts include: (i) stronger-thanexpected competition, (ii) higher-than-expected operational efficiency, and (iii) higher spectrum payouts.

Source: Kenanga Research - 22 Feb 2017