We attended DIGI’s briefing yesterday, where management updated its progress on the digital revolution. DIGI also reaffirmed its commitment to meet the Shariah threshold. Post briefing, there are no changes to our earnings forecasts. The recent price hiccup on its shares could provide bargain hunting opportunities to yield-hungry investors. We maintain our MARKET PERFORM rating with an unchanged DCF-driven target price of RM4.85 (WACC: 6.2%, TG: 1.5%).

Digital revolution. DIGI has shared the progress on digitisation of customer journey together with its in-house digital IT and customer management experts. As a result of concerted effort to push for greater digitization, the group’s self-served option has become a reality whilst working towards better customer experience, a process initiated since 2015. With 8.5m (or 72% of the total subscribers) Internet users in 3Q17 coupled with over 2.2m monthly active users on MyDigi apps, the group’s voice traffic to call centers has been reduced by 40%, thanks to higher digital interaction (28% vs. 7% in 2015).

Striving more for efficiencies. 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. Meanwhile, management also plans to transform its network to the cloud-based model (which is able to accommodate higher data capacities) and leverage on Telenor global scale on sourcing, infrastructure collaborations and talent. DIGI will continue to develop AI & machine learning and aim to deflect at least 40% of the traffic to live chats by 2020. Besides, DIGI also targeting to reduce its voice traffic to call centers to 80% by 2020 through greater digitization. In short, besides focusing on developing three key pillars (delivering sustainable growth, solid operational efficiency and product simplification & digitisation of core) for value creation, 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.

Still committed to retain the Shariah-compliant status but... DIGI has reaffirmed its commitment to return to the Shariah-compliant list in the coming months. Digi’s shares tumbled to its lowest price in over a year last Friday after the stock was removed from the latest Shariah- compliant list (where the November assessment is based on the latest annual audited accounts for respective companies). To recap, the hiccup was mainly caused by its 900MHz and 1800MHz spectrums’ obligation where DIGI has opted to settle the one-time fee at lump-sum payment (RM598.5m due on 1 November 2016) and boost its conventional debt exposure temporarily to RM2.3b (which led the group’s total conventional debt over total assets exceed the 33% Shariah threshold) at the end of FY16.

...the return to the Shariah-compliant list is still subject to external factors. Despite DIGI showing intention to return to the list in the next review (May 2018), it is still subject to: (i) the completion of an audited FY17 account, and (ii) the review of the SC’s Shariah Advisory Council. Note that, DIGI has established RM5.0b Islamic bond (Sukuk) programmes in April 2017 in keeping with the company’s commitment to tap on prospective Islamic capital and debt markets. With an available 82% (or RM4.1b) of Sukuk Programmes yet to be drawn down, the group is well positioned to comply with the Shariah threshold even taking the potential upcoming 700MHz spectrum obligation into consideration (by assuming a lump-sum payment of RM431m for 2x10MHz spectrum block). DIGI’s net debt to EIBTDA ratio remained healthy at 0.7x with plans to maintain below 2x over the next 3 year.

Source: Kenanga Research - 28 Nov 2017