2Q15 core earnings fell 6.9% YoY, 3.1% QoQ and 4.1% over 1H15, mainly on higher depreciation charges, broadly in line with estimates. BUY, with a DCF TP of MYR6.60 (19% upside). Digi is keeping its headline guidance. Despite a tougher operating environment, service revenue grew 1.3% YoY as data revenue eclipsed the decline in legacy revenues. We keep our forecast and expect a better 2H15, withsubscribers adjusting to the new tax regime.

A commendable quarter. Digi posted a decent set of 2Q15 resultsamidst the tougher operating conditions, with core earnings trending broadly in line. While blended ARPU eased to MYR45 (2Q14: MYR48), 2Q15 service revenue grew 1.3% YoY (+1.8% in 1H15) as data revenuegrowth more than offset the decline in legacy revenues. Its EBITDA margin rebounded to 45.7% in 2Q15, the highest since 4Q13 on lower sales of smartphone and devices as well as better efficiencies achieved. Digi announced a DPS of 5.9 sen which translates to a 99% payout ratio, bringing 1H15 DPS to 12 sen.

Outlook. Despite the weaker core earnings, Digi is retaining its guidance of low to mid-single digit service revenue growth and EBITDA marginsimilar to FY14 levels. Its capex guidance of MYR900m is also maintained, with the focus on LTE coverage expansion. Digi’s LTE coverage in five key market centres is over 65% while it is targeting population coverage of 50% by end-2015 vs 35% currently. Managementalso indicated further investments in fibre to beef up network quality,which should bolster customer experience. At the results call, management appeared slightly more positive on its 2H15 outlook as it believes the current price competition in the market is not sustainable.

Forecasts. We make no changes to our FY16/17 forecasts. Key earnings risks are: i) stronger-than-expected competition, and ii) data monetisation challenges.

Reiterate BUY, with a TP of MYR6.60. Digi remains our Top Pick for exposure to Malaysia telecoms. We believe concerns over the goods and services tax (GST) impact and intense competition have been adequately priced in, with the stock offering dividend yields of 5%. Digi istrading at a discount to its peers following the recent sell-down.

Briefing Highlights Digi’s 2Q15 results call was hosted by its CEO Mr Albern Murty and CFO Mr Karl Erik Broten. As expected, the key queries raised were on the competitive landscape. Digi has reaffirmed its guidance on revenue, EBITDA and capex.

Competition likely to be transitory. Digi views the underlying price competition in the market as temporary and driven by the industry’s intent to drive more mobile internet take-up. While it has largely defended its postpaid proposition, Digi recently introduced a new prepaid plan in response to Celcom’s revamped prepaid offering(Magic SIM). We think there remains a downside risk to the industry’s revenue growth prospects should the current spate of price competition continue. Management is, nonetheless, confident that its “Internal for All” strategy and affordable smartphone bundles will contribute towards stronger revenue uplift in 2H15.

We expect Digi to continue benefitting from the improvement in network quality and its expanding LTE footprint (target population coverage of 50% by end -2015 from 35% in 2Q15). The results of this is evident from the stronger postpaid revenue growth of 3.5% YoY (+3.2% QoQ) in 2Q15 – the highest in over three years. Digi’s prepaid revenue growth slowed to 0.5% YoY in 2Q15 from 2.4% in 1Q15 and 4.7% in 4Q14, due largely to the combined effects of the more cautious sentiment and the earlier confusion brought about by the implementation of the GST in April. It has stopped offering free mobile airtime and SMSes in response to the Government’s earlier call to cushion the impact of higher reload prices from the GST pass-through.

Key risks Key risks include: i) no letup in competition, and ii) lower-than-expected pick-up in data revenue.

Forecasts Forecasts. No change to our forecast. as we expect a better 2H.

Valuation and recommendation Maintain BUY. Our DCF-derived TP is maintained at MYR6.60 (WACC: 6.9%, TG: 3%). We believe the recent rout on its share price has mostly reflected the earnings risks while the stock now implies attractive net dividend yields of 5% .