We came away from a conference call with Ms. Inger Folkesen, its CFO feeling reassured by DIGI’s near-term prospects. The group will continue to focus on value propositions while keeping network quality a priority to manoeuvre around industry headwinds. We believe the group’s low-based blended ARPU allows it to effectively address affordability concerns. Industry-leading dividend yields remain a plus amongst peers. Maintain OUTPERFORM and DCF driven TP of RM4.25 (WACC: 7.1%, TG: 1.5%).

Cautious but with reason. DIGI expressed the need for tighter credit quality checks amidst ongoing economic difficulties. That said, the approach adopted could be more fluid as to recommend different packages to prospective customers based on their financial standing. This alleviated our concerns that the group might not fully capitalise on a possible appetite for downtrading, particularly from its peers, given that affordability is a growing issue among consumers. Based of 2QFY20 numbers, DIGI’s blended ARPU stood at RM40/mth while its listed peers range from RM47/mth-RM57/mth.

Value comes first. DIGI has consciously decided against offering fully “unlimited” data offerings and instead focused on a selective unlimited access model on high usage apps (i.e. Youtube, Facebook, Instagram, Twitter) without speed limits. Giving selective access could yield the highest equity and experience for customers on apps which most users would be accessing anyway, which might otherwise result in less sticky customers.

New ventures to expand market presence. DIGI’s entry into the fibre broadband space has opened new opportunities for the group to expand revenue streams. Management had also previously expressed the idea of packaging and bundling high value propositions into single billings for customer convenience. We find this convergence to be a natural course of action for telcos to keep customers more attached to their brands. On another note, DIGI’s collaboration with SenHeng to introduce the co-branded PlusOne Connect prepaid sim cards could attract new users with the prospects of retail rewards, particularly repeat customers. If proven successful, we do not discount that further collaborations would develop in the market.

Post-update, we leave our FY20E/FY21E earnings unchanged. Ms. Inger believes that the group has learnt much from the March MCO and has better clarity in navigating around shifting business climates from further movement controls. Therefore, she believes that the updated earnings guidance should remain intact, which to recap are: (i)service revenue declining by a low-to medium single-digit percentage, and (ii) EBITDA declining by a medium-to high single-digit percentage.

Maintain OUTPERFORM and DCF-driven TP of RM4.25. Our TP (based on WACC: 7.1%, TG: 1.5%) implies an EV/Fwd. EBITDA of 12,0x against our FY21E earnings. We continue to believe that DIGI is best positioned to ride through the uncertainties brought by Covid-19 and any resultant movement controls going forward. Amongst the Big-3, DIGI could be the least susceptible to economic headwinds as it already garners the blended ARPUs. Coupled by the highest dividend yield potential, DIGI offers a solid safety net for those who have to stay invested.

Risks to our call include: (i) weaker-than-expected service revenue, (ii) stronger-than-expected OPEX, and (iii) stiffer competition

Source: Kenanga Research - 30 Oct 2020