The immediate outlook remains challenging for DiGi. We expect competition to sustain into 2017, premised on the entrance of webe, spectrum reallocation exercise and efforts by Celcom to gain market share. Recent weakness in the ringgit may pose challenges to its IDD segment – through higher traffic costs and smaller migrant wallet share. Competitive pressures may limit its ability to reprice IDD rates upwards. Focus is on gaining a larger share of Malaysian subscribers, to ease fluctuations from the migrant market. A larger share of lower band spectrum awarded will improve its appeal to the enterprise segment. No change to our earnings estimates. Maintain SELL on DiGi with a TP of RM4.95/share.

Competition Still Intense. Showing no signs of relief, competitions remains intense in both the postpaid and prepaid segment. Implying lower data yields, we continue to see an increase in data offered at existing price points. Recently, Digi refreshed its postpaid packages, doubling its data allocation to 20GB (10GB anytime + 10GB weekend) at the same price of RM80/month. To create simplicity, postpaid packages were also streamlined to three main plans. Similarly, in the prepaid segment, it has bumped up its offerings to include 50% more quota for its data add-ons. We expect this trends to sustain into 2017 – underpinned by the entrance of webe, spectrum reallocation exercise and efforts by Celcom to regain market share. With no announcements made to extend the duration of the GST prepaid rebate, this may also have an impact on prepaid usage in 2017.

Weaker Ringgit to Pose Challenges. Recent weakness in the ringgit may pose challenges to its IDD segment – due to higher traffic costs and a squeeze in migrant’s wallet share. While it has recalibrated its IDD prices since 2QFY16, this does not take into account the recent further weakness to the ringgit. The current average USD/MYR rate for 4Q2016 stands at RM4.30, a 6.3% increase from the previous quarter. Existing competitive pressures may limit its ability to reprice rate upwards. We estimate every 1% increase in its traffic cost, decreases its earnings by 0.5%, ceteris paribus.

Targeting Malaysian Subscribers. Not ignoring its IDD market, focus will be on gaining a larger share of Malaysian subscriber. This will help ease dependency and volatility related to its migrant market. Its data focused Digi Prepaid Live proposition is targeted to Malaysian subscribers, while its IDD themed Digi Prepaid BEST pack is aimed at migrant workers. Aiding its cause, an increased share of lower band spectrum will help it penetrate opportunities within the enterprise segment.

Working on New Spectrum. The spectrum migration exercise is currently being carried out in phases, beginning September 2016 until June 2017. During this time, base stations will be migrated to the new reallocated spectrum blocks. By 1st July 2017, all operators should be operating in their new spectrum blocks. There are still no updates with regards to a further review of spectrum in the 700MHz, 2300MHz and 2600MHz bands. Ideally, the group would like to have approximately 10-15MHz of lower band spectrum.

Valuation. Leave our earnings estimates unchanged. We value DiGi at a TP of RM 4.95 – based on an unchanged WACC of 7.7% and long term growth rate of 1.0%. We are projecting flattish earnings for the group in 2017, amid sustained competitive pressures and challenges in its IDD segment. We believe the stock is fairly valued, as it trades slightly above its historical average EV/EBITDA at 13.3x. SELL.

Source: TA Research - 20 Dec 2016