We do not expect any surprises from  DiGi’s upcoming 3QFY14 results. We maintain our BUY call and MYR6.50  DDM-based  TP,  reflecting  11% upside. For 3QFY14, we expect  revenue growth to be sustained at 5.0% (1HFY14: +5.0%)  and earnings to grow 9.0% y-o-y, partly boosted by  a low effective tax base in 3QFY13. A stable competitive environment and continued growth in mobile internet growth are key drivers, in our view.

No surprises. We expect a steady 3QFY14 from DiGi, and expect y-o-y revenue  growth  to  be  sustained  at  5.0%  (1HFY14:  +5.0%).  Thus,  we forecast 3QFY14 earnings to  grow 9.0% y-o-y, partly boosted by a low effective  tax  base  in  3QFY13  (16.7%).  Overall,  we  estimate  9MFY14 revenue growth of 5.0% to be still within  management guidance (4-6%) while we anticipate core earnings to grow by 17.0%.

Stable competition. We believe DiGi’s growth will likely be supported by a  relatively  stable  competitive  environment.  Other  than  Maxis’  (MAXIS MK,  NEUTRAL,  TP:  MYR6.00)  launch  of  MaxisOne  Business  for business  users,  we  believe  3QFY14  was  rather  quiet  in  terms  of  new product  launches.  Besides  that,  Celcom  remained  quiet  as  it  works  to resolve  issues  related  to  its  IT  transformation.  We  note  that  its  ARPU levels for both prepaid  and postpaid have  been holding up quite well for several consecutive quarters, which should bode well for earnings. 

Mobile internet growth momentum should continue. Continued sales of mid-tier smartphones and further inroads in the postpaid market will likely drive DiGi’s mobile internet revenue growth (1HFY14: +40.3% y-oy).  As at 2QFY14, its  smartphone penetration stood at 41.9%, and we expect this figure to continue rising steadily  as mid-tier smartphones  likeXiaomi  continue to remain popular.  Following some marketing efforts to highlight  the  reliability  of  its  new  network  for  data  consumption,  we believe DiGi could make further inroads in the postpaid segment.

Dividends. We forecast a third interim DPS of 6.5 sen (100% payout). 

Earnings forecasts. We introduce our FY16 earnings forecasts.

Investment  case.  We maintain  BUY  on  the stock,  with  an  unchanged DDM-based TP  of MYR6.50.  We  like  the company  for  its  strong growth in the prepaid segment, growing revenue market share and good traction in  data monetisation.  Our  TP  translates to a FY15 P/E of 23x, which is comparable to industry peers.

Source: RHB