We attended a briefing by DIGI yesterday, where management officially introduced its new CFO, Mr. Nakul Sehgal, and provided company updates to the investment community. The group reiterated its top-line and EBITDA guidance for 2017 despite expecting the industry’s competition to remain fairly active in the remaining months. Post briefing, there is no change to our earnings forecasts. We maintain our MARKET PERFORM rating with an unchanged DCF-driven target price of RM4.85 (WACC: 6.2%, TG: 1.5%).

Strong financial leader. DIGI’s new CFO, Nakul Sehgal, has taken over the group’s financial seat since 1st August. Before this appointment, Nakul served as CFO of Telenor Hungary since January 2016, overseeing all financial matters and holds the responsibility for establishing and executing company’s strategy, and the enterprise risk management efforts. Nakul joined Telenor Group in May 2010 as head of financial reporting in Telenor India and had held various leadership positions within the finance department.

Paving the way to deliver 2017 guidance. DIGI remains confident in delivering its FY17 targets (a low-to-mid single-digit YoY decline in service revenue, stable EBITDA margin at c.45% similar to FY16 level, and capex at 11%-13% of service revenue) despite competition is expected to continue to be fairly active in 2H17. Management believes the aggressive competitive pricing model is not sustainable for the long-run and thus will continue to focus on strengthening its network quality (via the newly assigned 900Mhz spectrum) as well as digital innovations (through emphasizing on financial & IoT services) to sustain its long-term growth. Besides, DIGI will continue to move away from the non-profitable segments (i.e. IDD segment) to other segments (i.e. providing total business solutions for both the SME and enterprise segments) to yield better margin. Note that, Digi’s LTE/LTE-A population nationwide coverage has reached 86%/45% in 1H17 with an 8,000KM fibre network being built.

Digital verticals. In light of the explosion in data usage and emergence of multiple technologies all converging on the smartphone, DIGI believes new areas such as IoT, connected cars and mobile financial services could provide new and more equitable business models over the long-term. The group has ventured into several startups in FinTech (i.e. via Vcash), IoT (IFleet – connected vehicles) and B2B (ijual) segments over the past few years and aim to tap on the opportunities from such ventures. All in, we believe DIGI is heading towards in the right direction given that market prices offered by telecom players are already at a very competitive level, thus the key differentiating factors will likely come from the value-added services (i.e. big data analytics and IoT) and consumer experience.

Striving more for efficiencies. DIGI 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 cloud-based model (which is able to accommodate higher data capacities) and leverage on Telenor’s 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 three-year, in-line with Telenor Group’s cost optimization initiative.

Source: Kenanga Research - 8 Aug 2017