FY15 results were within expectations, ie 96%/97% of our/consensus estimates. Maintain NEUTRAL with a revised MYR4.70 TP (from MYR4.60, 7% downside) on unattractive valuations. Despite the positive development from the spectrum reallocation and assured progress of Digi’s aggressive 4G-LTE rollout, we remain cautious on its prospects due to unrelenting industry competition – heightened on U-Mobile’s additional spectrum allocation and TM’s potential entrance.

The positive spectrum. DiGi.Com (Digi) is positive on the recent allocation of the 5 megahertz (Mz)/20MHz (from 2MHz/25MHz) of the 900MHz/1800MHz spectrum by the Government. The additional 900MHz would help optimise capex and enhance coverage, particularly in-building coverage. Nonetheless, we expect competition in the mobile segment to intensify as U-Mobile also gained more spectrum and coupled with Telekom Malaysia’s (TM) (T MK, NEUTRAL, TP: MYR6.80) entry into the market by 1H16, which ought to lead to further ARPU pressure.

FY15’s MYR1.8bn core earnings were within expectations, making up 96%/97% of our/consensus estimates respectively. The weaker result was due to higher traffic costs (from the weaker MYR forex) and increased depreciation charges (+27.5% YoY) from the rapid 4G-LTE network expansion. Digi’s toplinewas also weaker due to subdued non-services (-17.5% YoY) and a structural decline in voice (-6.9% YoY) revenues. Although management has guided for flat service revenue, EBITDA and capex growth, we believe margins could come under pressure due to ARPU compression from heightened competition.Silver lining. Despite the weaker results, Digi added 704,000 subscribers(subs) in 2015, which management attributed to increased data users from the expanded 4G LTE footprint and the strategic development of digital services. We were pleased to note that the firm reported its best ever postpaid service revenue growth in 4Q15 and believe the focus on data should help ease ARPU pressure from steepening competition. A fourth interim dividend was also declared, taking full year pay-out to 22 sen, a 4.4% yield.

Maintain NEUTRAL. FY16F-17F core earnings were revised -3% and +1% respectively after updating our assumptions. Despite the positive developmentsfrom the spectrum reallocation and the good progress of its 4G-LTE rollout, we remain cautious on Digi’s outlook on the unrelenting industry competition. Risks to our call include less-intense-than-assumed-competition and higher than expected capex. Maintain NEUTRAL, with a new DCF-based MYR4.70 TP(from MYR4.60, 7% downside, 8% WACC, 3% TG), ie an implied 12x FY16F EV/EBITDA. Digi currently trades at 13.3x FY16F EV/EBITDA, a premium to the 9.6x industry average, albeit supported by a decent prospective dividend yield of 4.6%.

Key Takeaways From The Results Call 4G-LTE network expansion. Digi’s LTE subs base accelerated to 2.3m in 4Q15 (+774,000) from 1.5m in 315. This was driven by the aggressive expansion of its LTE sites, which havenow reached 65% of the population vs 50% in 3Q15. Note that LTE-Advanced (LTE-A) coverage in 3Q15 stood at 29%, and coverage is currently available in the Klang Vlley, Penang, Perak, Kuantan, Johor Bahru, Kota Kinabalu and Kuching. We are positive on Digi’s rapid LTE network rollout, which has contributed to the pick-up in postpaid revenue in recent quarters. Management intends to maintain the strong momentum via extensive 4G-LTE roadshows nationwide to capture more data customers. Digi believes the 4G-LTE network ought to build a solid foundation for stronger data revenue going forward. It aims to focus on digital services and capitalise on consumer’s increasing personalised lifestyles. Digi is also looking to introduce self-service capabilities through the MyDigi app.

Spectrum update. Digi has said that the 5MHz of the 900MHz spectrum allocated by the regulator (which comes into effect from Jul 2017) would be contiguous, and, hence, reduce interference and improve coverage efficiency. It is awaiting further details from the Malaysian Communications and Multimedia Commission (MCMC) with regards to the spectrum fee structure.

FY15 results. Despite posting a 6% YoY growth in subs, Digi registered a 0.7% contraction in prepaid revenue. This contrasts with Maxis’ (MAXIS MK, SELL, TP: MYR4.70) results, which posted a 6.2% growth in prepaid revenue despite a 0.6% contraction in prepaid subs. We believe this was due to Digi’s larger exposure to more price-sensitive subs, stiff competition and the erosion in its share of the overseas foreign workers (OFW) market.

Source: RHB Research - 10 Feb 2016