We  met  DIGI’s senior management team in an informal group meeting yesterday.  Management  appears  upbeat  on  its  plans  for  2014,  and  is prepared to spend more capex to capitalise on its recently modernised network  to  generate  more  growth  in  data.  The  prepaid  segment  saw good growth in FY13, but postpaid contribution will likely increase now that DIGI is armed with better capacity and coverage. Maintain BUY.

Plugging  the  holes.  Management  said  among  others,  it  will  focus  on ramping  up  network  population  coverage.  Although  this  would  involve more  capex  (it  only  guided  for  a  FY14  capex/sales  ratio  that  is  higher than  FY13’s 11%),  we  think  this  is  the  right  approach,  as  it  will  enable the  telco  to  better  monetise  data  by  serving  areas  that  are  currently underserved, as well as close the gap with its peers and increase scale. By  year-end,  management  expects  3G  coverage  to  reach  86%  (from 80% currently vs peers’ >85%) and roll out 1,000 LTE sites. 

Postpaid contribution likely to increase. DIGI has generally held back on  driving  postpaid  subscriber  growth,  but  this  looks  likely  to  change. Armed with better capacity and coverage, we think it could become more aggressive in postpaid – something it was unable to push for prior to the completion of its network modernisation in 3Q13.

Margins. Management expects EBITDA margins to remain stable going forward.  We  understand  that  DIGI  is  beginning  to  see  some  scale  in data,  given  that  mobile  internet  in  4Q13  expanded  by  2-3x  vs  1Q12. Ongoing  efforts  to  increase  fiberisation  of  sites  in  collaboration  with Celcom  (3,000km  already  jointly  rolled  out  and  expected  to  reach 10,000km by 2016) present another opportunity to reap cost savings.  

Risks.  The  risks  include:  i)  weaker-than-expected  net  adds,  ii)  worse-than-expected voice tariffs, and iii) intense competition.

Forecasts. We are leaving our earnings forecasts unchanged.

Investment  case.  Maintain  BUY  on  DIGI,  with  an  unchanged  DCF-based  FV  of  MYR5.60  (WACC:  8.5%,  TG:  2.0%).  The company’s  2014 revenue  growth  on  the  back  of  solid  data  growth  stands  out  among  its local peers while its FY14 dividend yield of 5% is decent.

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DiGi is the third largest mobile operator in Malaysia.

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Source: RHB