Digi’s FY14 results met expectations. Maintain NEUTRAL  and  a  DCF  TP of  MYR6.60  (2.2%  upside).  Digi  appears  slightly  more  upbeat  on  the outlook for 2015, underpinned by rapid mobile internet uptake  and even after factoring in  rising  competition and the GST. While timeline of the spectrum  re-farming  process  remains  unclear,  Digi  is  encouraged  by the more equitable stance adopted by the regulator.

No surprises.  Digi’s core net profit of MYR2.03bn  (+11.6% YoY)  came in  line  with  our  and  consensus’  forecasts.  YoY  revenue  growth  was steady  at  4.2%,  underpinned  by  the  25%  growth  in  data  and  internetrevenues.  This  was  enough  to  offset  the  decline  in  legacy  (SMS  and voice) revenue  that continues to affect the telco industry  and suggests that  Digi is more effectively monetising data.  EBITDA margin remained stable  at  45%.  Digi  announced  a  DPS  of  7.2  sen  for  4Q14,  which brought total FY14 DPS to 26.1 sen, translating into a 100% payout.

Cautiously  optimistic  going  forward.  We  feel  that  management  is slightly  more  optimistic  vs  its  peers  on  the  industry  outlook  for  2015. Management  has  guided  for  a  low  to  mid  single-digit  service  revenue growth  going  into  FY15  after  factoring  in  the  impact  of  heightened competition and GST. Digi aims to maintain its strong growth momentum in the  internet and data segment, driven by the increasing affordability of smartphones in the market.  On the  possibility of a spectrum re-farmingexercise going forward,  management is confident that the  regulator  will ensure an equitable distribution of spectrum. This should be beneficial to Digi, given its limited spectrum.  Without more spectrum, there could besome  upside  risk  to  Digi’s  future  capex  as  it  might  have  to  incur more cost to improve its capacity and network efficiency.

Forecasts. Our FY15/16 earnings forecasts are  lowered marginally  after updating  our  FY14  numbers.  We  have  also  introduced  our  FY17 earnings forecasts.

Maintain  NEUTRAL.  Our  DCF-based  TP  is  unchanged  at  MYR6.60. Although  Digi’s  fundamentals  remain  solid,  we  believe  valuations  are already fair with most of the positive catalysts priced in. 

Briefing highlights
Digi’s  FY14 results call was hosted by its  CEO, Lars Ake Norling  and CFO  Karl Erik Broten. The key takeaways were:Cautiously  optimistic  on  FY15’s  service  revenue  growth.  We  feel  that management is slightly more optimistic vs its peers  on the industry outlook for 2015. Management  has guided for a  low  to mid  single-digit service revenue growth  going into FY15. This is even after factoring in: i) the more competitive telco landscape with both TM (T MK, NEUTRAL, TP: MYR7.00) and U-Mobile possibly upping their ante in 2015;  and ii) the impact of the implementation of  the  goods and services tax (GST)going forward.  On  GST, management is still unsure of the  impact of the  tax on its earnings, although it believes that there could be some short-term knee-jerk reaction due to the expected slowdown in consumer spending. That said, it also believes that the telco industry might not be the most vulnerable,  as  mobile internet is seen  more as  a  necessity  rather  than  a  discretionary  item,  and  as  such,  spending  on  mobile internet  could be more inelastic.  Digi also targets  to maintain its EBITDA margins at around the 45% level achieved in FY14.

Strong  data  growth  to  buoy  earnings  going  forward.  The  data  and  internet segment grew at a combined 25% YoY in FY14, and this has  more than offset the continued  decline  in  legacy  (SMS  and  voice)  revenue.  Digi  aims  to  maintain  its mobile  internet  growth  momentum  and  position  as  the  mass-market  leader  in  the data and mobile internet segment going forward. As such, the 2015 capex will mainly be spent on improving customers’  network experience as well as expanding its LTE coverage  to  about  50%  by  year-end  (currently  only  at  32%).  Digi’s  internet penetration is currently at 54% for prepaid and 72% for postpaid. With the increasing demand  for  affordable  smartphone  from  brands  such  as  Oppo  and  Xiaomi,  we believe that  Digi is in the  position to take advantage of this growing demand,  given that its products are mainly targeted towards the mass-market /affordable segments. Furthermore, the affordability of these smartphones  means less subsidies  on these phones, thus reducing its average cost per subscriber.

Other updates.  Touching on the possibility of spectrum re-farming,  management is confident that the Malaysian Communications and Multimedia Commission  (MCMC)will ensure the equitable distribution of spectrum if and when the spectrum re-farming exercise materialises. We reiterate our view that this will be positive  for Digi,  due to its  limited  900  MHz  spectrum  and  as  it  will  need  more  to  re-farm  the  1800MHz spectrum  for  LTE.  However,  should  there  be  further  delays  in  the  exercise,  therecould  be some upside risk to  Digi’s  future capex  as it  will  likely  have to spend more on improving capacity and network efficiencies. We are maintaining our capex target of  MYR900m for  now,  in line  with management’s  guidance.  On the  setting  up  of  a business  trust,  management  is  still  assessing  the  possibilities  and  will  need  more clarity before making a decision.

Key risks
Key  risks  include:  i)  a  lower-than-expected  pickup  in  data  revenue;  and  ii) competitors  chipping  away  its  market  share;  and  iii)  further  delays  in  MCMC’s spectrum refarming exercise.

Forecasts
Forecasts.  Our  FY15/16  earnings  forecasts  are  revised  by  less  than  5%  after updating our FY14 numbers. We are introducing our FY17 earnings forecast.

Valuation and recommendation
Maintain NEUTRAL.  Our DCF-based TP is unchanged at MYR6.60.  Although Digi’s fundamentals remain solid, we  believe  valuations are  already  fair,  with most of the positive catalysts priced in.

Source: RHB