The 1Q13 results reaffirm our concerns that margins may come under pressure from handset subsidies. However, management expects margins to improve as handset sales taper off. Nonetheless, DiGi’s revenue growth momentum appears on track. Management is still exploring the possibility of the business trust structure, which could act as a re-rating catalyst. Maintain Neutral with fair value of MYR5.10.

- Within. DiGi’s 1Q reported net profit of MYR328m (+2.5% y-o-y, +33.9% q-o-q) at first glance appears below our and consensus expectations, accounting for 21% and 20% of full-year estimates. However, excluding accelerated depreciation (1Q: MYR91m), we estimate 1Q core net profit of MYR397m (see Table 2), which accounted for 24% of FY12 figures and is line with our expectations.

- Decent q-o-q revenue growth despite seasonality. Q-o-Q, revenue growth was decent (+1.1%) as the 1.1% drop in service revenue (due to festivities and prolonged business closures) was more than offset by a surge in handset sales. Q-o-Q, strong handset sales (+25.0%) from strong demand for iPhone 5 and Samsung Note 2, and decent data growth (+2.0% q-o-q) helped offset decline in prepaid voice (-2.2%) and postpaid voice (4.1%). Q-o-Q, 1Q EBITDA margin was marginally lower at 43.7% (4Q12: 44.5%) mainly due to handset subsidies, but net profit rose 33.9% due to a lower effective tax rate.

- Briefing highlights. EBITDA margin (1Q13: 43.7%) appears weak but should trend higher going forward due to lower handset subsidies when DiGi expects to sell less handset bundles. We can expect DiGi to increase its dividend payout ratio going forward, but it is unlikely for the ratio to exceed 100% for now. Besides that, we gather that DiGi is still in
discussion with MCMC to refarm 1800Mhz for LTE use.

- Dividends. DiGi declared a 1st interim net DPS of 3.8 sen (translating to 1Q EPS payout ratio of 90%). For FY13, we estimate DPS of 20 sen assuming 100% payout ratio.

- Forecasts. Maintained.

Source: RHB