There were  no  surprises  from  DiGi’s  1Q14  results, which were  in  line with  expectations  and  management  guidance.  Dividends were  also as expected, following expectation of lower depreciation charges. Maintain BUY,  with a revised  FV of MYR6.20 (from MYR5.60),  after  changing our valuation  method  to  DDM  (from  DCF).  DiGi  offers  above  industry revenue  growth  while  its  FY14  dividend  yield  is  decent  at  4.8%.  The stock remains our top pick for exposure to Malaysian telecoms.

• In line. DiGi’s 1Q14 core net profit of MYR485m (-13.4% y-o-y, +8.0% q o-q) was within our (24%) and consensus’ (27%) full-year estimates.
• Seasonally  weaker.  Q-o-q,  overall  revenue  was  marginally  lower  by 0.9%  (4Q13:  +2.0%)  as  higher  handset  sales  (+5.0%)  mitigated  a seasonally weaker service revenue (-1.5%). Service revenue growth was lower q-o-q despite stronger data (+2.5%), as voice revenue fell 3.6%,partly due to slightly lower mobile termination rates. DiGi’s 1Q14 EBITDA margin dipped 1.5 ppts to 45.3% (3Q13: 46.8%) due to higher staff costs and maintenance expenses  arising  from continuous network expansion. Meanwhile, core net profit fell 13.4% q-o-q to MYR485m, mainly owing to higher taxation (+25.7%).
• Briefing  highlights.  Management  maintained  its  2014  guidance,  and expects revenue to grow 4-6%,  mainly driven by prepaid and data,  and EBITDA  margins  to  remain  stable.  There  was  some  churn  in  postpaid but  management  expects  postpaid  subscriber  growth  to  see  some traction  in  the  coming  quarters,  supported  by  increasing  its  3G population  coverage  from  82%  (vs  peers’  >85%)  currently  to  86%  by year-end. We  expect  DiGi  to remain  careful  on  handset  subsidies  and therefore,  do  not  expect  2Q14  EBTIDA  margin  to  weaken  significantly from the recent launch of  the Samsung S5.  There is no further clarity on the company’s proposal to set up a business trust and management  said it is still assessing other avenues to optimize its under leveraged balance sheet, but did not offer any details.
• Dividends.  DiGi  declared  a  first  interim  net  DPS  of  6.2  sen,  which translates  into  a  payout  ratio  of  99%.  We  maintain  our  forecast  FY14 DPS of 25.6 sen, assuming a 100% payoutratio.

Briefing highlights
Outlook.  In maintaining its  2014 guidance, management expects revenue to grow 4-6%,  mainly driven by  prepaid and  data, while  expecting  EBITDA margins to remain stable.

Given its 1Q14 revenue growth of 4.3% y-o-y, we believe DiGi is largely on track to meet its guidance. Its management said there was some churn in postpaid in 1Q14as  the  company  was  not  very  aggressive  on  handset  subsidies.  Nonetheless,  it expects postpaid subscriber growth to see some traction in the coming quarters. DiGi’s push in postpaid would be supported by increasing its 3G population coverage from  82%  (peers’  >85%)  currently  to  86%  by  year-end.  It  currently  has  more  LTE sites in Klang Valley, Johor Bahru, Kota Kinabalu and Kampar, and is targeting 1,500 LTE sites by year-end.

EBITDA margin (1Q14: 45.3%) appears in line with management’s guidance of stable EBITDA  margin  (FY13:  45.2%).   We  expect  DiGi  to  remain  careful  on  handset subsidies and therefore,  do not expect 2Q14 EBTIDA margin to weaken significantly from the recent launch of the Samsung S5.

Capex.  Management provided more clarity on its  FY14 capex, and  expects to spend MYR900m  in  network  and  infrastructure  expansion  plans  to  capture  growth opportunities, which includes more fibre deployment. Previously,  it  had only guided for a FY14 capex/sales ratio that is higher than FY13’s 11%. Based on our FY14 revenue  forecast  of MYR7.1bn,  management’s capex  guidance of MYR900m implies a higher capex/sales ratio of 12.7% for FY14. The company has spent MYR202m on capex in 1Q14 so far.

Business trust.  There was no further clarity on the company’s proposal to set up a business  trust.  Management  said  it  is  still  assessing  other  avenues  to  optimize  its under leveraged balance sheet, but did not offer any details.

Risks
The  risks  include:  i)  lower-than-expected  subscriber  net  adds;  ii)  worse-thanexpected voice tariffs; and iii) intense competition.

Forecasts
We make no change to our earnings forecasts.

Valuation and recommendation
We  maintain  our  view  that  among  the  cellcos,  DiGi  has  done  a  better  job  at monetising data on the back of strong revenue growth, which  helped margins to stay resilient.  This  is  reinforced  by  a  solid  set  of  1Q14  results,  and  management’s reiteration of  its  2014 guidance.  Growth will continue to come from prepaid, but  the potential  upside may come from a greater push into postpaid as DiGi is now armed with a modernized network. Maintain BUY, with a revised FV of MYR6.20 (previously MYR5.60),  after changing our valuation method from DCF (discounted cash flow) to DDM (dividend discount model).  Our FV translates to a FY15 P/E of 23x, which is comparable to Maxis and TM.  We believe a  DDM valuation  will  better reflect DiGi’s ability  to  pay  higher  dividends  due  to  its  significantly  lower  depreciation  charges,having written off its old network.

Company Profile

DiGi is the third largest mobile operator in Malaysia

Source: RHB