Following the sharp price retracement, we upgrade DiGi to BUY (from Neutral). Our DCF-derived (WACC: 6.9%, TG: 3%) TP is unchanged at MYR6.60 (21% upside). At current levels, we believe the market has priced in the GST impact with FY16F P/E at a discount to its 5-year mean, while its dividend yield is rising to 4.9-5.3%, the highest among its domestic peers.

• Worst performer YTD. DiGi.Com’s (DiGi) share price has fallen by 9%(-12% YTD) over the past month, surpassing the 8.2%/4.6%/1.3% declines for Axiata (AXIATA MK, NEUTRAL, TP: MYR7.20), Maxis(MAXIS MK, NEUTRAL, TP: MYR6.50) and Telekom Malaysia (TM) (T MK, NEUTRAL, TP: MYR7.40) respectively on the broad market weakness and concerns over rising competitive risks. At current levels, we believe values are emerging with its dividend yields rising to 5%.
• Mobile internet star. DiGi’s 39.7% FY14 mobile internet revenue growth outperformed the industry’s 24.7%, thanks to its good prepaid data monetisation efforts, innovative smartphone bundles and rising smartphone penetration (1Q15: 53.2%, 4Q14: 38.1%). Although 2Q15 service revenue growth is likely to be subdued (1Q15: +2.2%) on the confusion over the goods and services tax (GST) over mobile prepaid cards (DiGi has a larger revenue exposure to prepaid subscribers whoare more price-sensitive), we think the downside will be mitigated by the continuing strong mobile internet revenue growth alongside its expanding LTE footprint (~50% coverage by end-2015).
• Guidance. We believe DiGi’s FY15 service revenue growth guidance of “low to mid-single digit” has largely reflected the GST impact and competitive headwinds (both from a rejuvenated Celcom and the recovery in Maxis’ prepaid revenue momentum).
• Key risks. A protracted decline in prepaid airtime consumption propensity (extended GST fallout), higher-than-expected capex and escalating competition are major earnings risks. These are nonetheless partially offset by DiGi’s good track record of execution.
• Upgrade to BUY, TP unchanged at MYR6.60. We believe the stock has priced in the GST impact following the sharp selldown with FY16 P/Eof 19.4x at a 19% discount to its domestic peer average of 24.1x (average regional peers of 22.1x) and below its 5-year mean of 22.3x.