We  downgrade  Digi  to  NEUTRAL  with  an  unchanged  MYR6.60  TP,  a 9.1% upside.  In our view,  most of its upsides  have  been priced in  and the positive impact from the GST may be neutralised by its more price-sensitive  customer  base.  Digi’s  strong  prepaid  value  proposition, supported  by  its  modernised  network  and  converged  billing  platform,should still see it outpacing its peers in data revenue growth. 

Turning  cautious.  Management  appears  more  cautious  going  into 2015,  as  it  expects  the  sluggish  industry  mobile  revenue  trend  to continue  on the back of heightened competition.  The  implementation  of the  goods  and  services  tax  (GST)  in  April  2015  could  prove  to  be  a double-edged sword,  in our opinion. This is because  the  expected  costsavings  from  the  6%  service  tax  pass-through  for  prepaid  subscribers could be mitigated by lower overall  consumption due to the slowdown in consumer  spending.  About  85%  of  Digi.com’s  (Digi)  subscribers  are prepaid  and  comprise  the  more  price-sensitive  users  and  overseas foreign workers. We estimate the GST will boost Digi’s earnings by 6-9% for FY15/FY16 respectively, assuming there are no changes in customer behaviour and all else being equal. 

Still well-positioned.  Digi  should  continue  to make  further inroads into the prepaid data market, supported by its affordably priced smartphones, attractive data bundles  and its new converged billing platform  that  has real-time  dynamic  charging  capabilities.  It  is  on  track  to  achieve  3G population coverage target of 86% by end-December (3Q14: 84%).                                                                  

Spectrum  re-farming  could  be  positive.  In  our  view,  it  is  not unreasonable  to  assume  that  Digi  stands  to  benefit  most  from  the  refarming  process  as  it  currently  has  limited  900  megahertz  (MHz)spectrum  and  needs  more  to  re-farm  the  1800MHz  spectrum  for  LTE. That said, given the little visibility on the timeline and the structure of the process, we believe the exercise may occur in 2H15 at the earliest.

Downgrade  to  NEUTRAL  with  earnings  forecasts  maintained. Although Digi’s fundamentals remain solid,  we  downgrade  the stock to NEUTRAL  (from  Buy)  with  an  unchanged  DCF-based  MYR6.60  TP (WACC: 7.1%, TG:  3%),  as we believe most of  the  upsides  have been priced in and given that it could be at risk post GST.