We met DiGi’s new CFO, Karl Erik Broten, in an informal group meeting yesterday. While unable to share more on the business trust possibility, he  indicated  that  the  prepaid  segment  has  been  seeing  good  growth, and  was  upbeat  on  the  telco’s  soon-to-be-modernised  network. However,  we  expect  tepid  core  earnings  growth  in  FY13  and  limited scope for margin improvement in the short term. Maintain SELL.  

- Prepaid  segment  the  growth  driver.  Management  indicated  that  the improvement  in  2Q13  prepaid  average  revenue  per  user  (ARPU)  is  a positive trend, and we see it as a healthy sign of data monetisation. This is important since at least half of DiGi’s revenue growth is expected to be driven  by  data.  In  our  view,  the  increasing  popularity  of  mid-range smartphones should also help drive data growth in the prepaid segment.

- Network  modernisation.  Management  said  its  network  modernisation should  be  completed  in  3Q13,  and  is  upbeat  on  closing  the  3G population coverage gap compared to  its peers – DiGi is targeting 75% by  year-end  while  its  peers  are  now  at  c.80%.  To  capitalise  on  its improved  network  and  spur  data  growth,  Management  will  in  4Q13 introduce more affordable tablets (

- Margins. Management expects EBITDA margins to remain stable going forward.  While  there  are  network  opex  benefits  from  a  modernised network,  its  ongoing  efforts  to  ramp  up  LTE  coverage  to  50%  by  2017 imply that margin improvements may not be visible in the short term.    

- Risks.  The  risks  include:  i)  stronger-than-expected  net  adds,  ii)  higher-than-expected voice tariffs, and iii) quicker data monetisation.

- Forecasts. We leave our earnings forecasts unchanged.

-  Investment  case.  Maintain  SELL,  with  an  unchanged  DCF  FV  of MYR4.10  (WACC:  8.5%,  TG:  1.5%). DiGi’s revenue growth momentum has not been as strong as anticipated, and will require a bigger push in 2H  to  avoid  potential  disappointments.  Its  postpaid  voice  revenue  has yet  to  fully  recover  from  the  network  modernisation  hiccups  in  2Q12. Potential pressure to margins remains a risk depending on competition. 

Source: RHB