Digi hosted an analyst briefing, with its outlook for 2017 and recent sukuk programmes being the center-point of discussions. Service revenue and EBITDA are expected to be flattish in 2017. Priorities will be on defending its prepaid revenue market share, while growing its consumer and enterprise postpaid customer base. Digitisation of its core business will be central in driving opex down over the medium term. The recent establishment of its sukuk programmes helps secure its long term financing needs at a lower borrowing cost. Its existing Net debt/EBITDA of 0.6x is way below its comfortable threshold of 2.0x. However, dividend upsides are capped by its earnings. No change to our call, as we maintain SELL on Digi with a TP of RM4.90/share due to fair valuations.

Reflecting on 2016

The past year has been challenging for both Digi and the industry as a whole. Industry mobile service revenue reported its steepest decline at an estimated RM1.0bn vs. a decrease of RM122mn for Digi. Despite this, the group did well in defending EBITDA (-0.9% YoY) as cost management initiatives led to improved margins. Milestones achieved in 2016 include: 1) Growth in postpaid segment; 2) Strengthened 4G position; 3) Allocation of increased 900MHz spectrum share and 4) #1 and #2 position in subscriber and service revenue market share.

Flattish Predictions for 2017

Difficult macro and industry conditions are expected to carry on into 2017. The group is expecting service revenue and EBITDA to sustain at 2016 levels. Capex was guided at 11-13% of service revenue. In our estimates, we are predicting service revenue and EBITDA to decrease by 0.9% and 1.8%. Competition in the industry remains intense, with no noticeable slowdown from UMobile post spectrum reallocation and entrance of webe. Digi has taken a stance to not be super aggressive on market pricing. Efforts instead will be focused on monetising data, to leverage on increased subscriber usage.

Defending Revenue While Optimising Costs

Priorities in 2017 will be to defence prepaid revenues, while growing its consumer and enterprise postpaid customer base. We expect the prepaid segment will remain under pressure, particularly in the migrant segment. Improved indoor coverage from increased 900MHz spectrum exposure should help in its efforts to gain postpaid market share. As revenues are expected to be flattish, cost optimisation efforts will also take priority. In its recent Capital Markets Day 2017, Telenor set targets of achieving annual net opex reductions of 1-3% towards 2020. As part of its mature Asia cluster, Digi is expected to contribute to this. Spearheading cost reduction efforts are initiatives to digitise its core business. One potential cost saving area is the automation of customer service operations. A new MyDigi app is in the pipeline, with increased selfservice functionalities. This is expected to drive increased adoption of the app, which currently has 1.5mn users. Apart from digitisation, savings can also be achieved by leveraging on cost synergies via its relationship with Telenor.

Comfortable Net debt/EBITDA of 0.6x

Last week, the group made announcements on the establishment of Islamic Medium Term Notes (IMTN) and Islamic Commercial Papers (ICP) with a combined limit of up to RM5.0bn. While there are no urgent needs for funds at this moment, the programmes helps ensure the availability of long term financing needs (future spectrum reviews, M&A opportunities, network related investment and etc.). RAM ratings have assigned an AAA/Stable and P1 rating for the IMTN and ICP programme. The sukuk programmes are expected to have a borrowing cost lower than its existing cost of funds. It remains in a comfortable capital position with Net debt/EBITDA at 0.6x (vs. self-imposed threshold of below 2.0x). Nonetheless, potential upsides to dividends are capped by its earnings. While a business trust structure has been discussed in the past, there have been no significant developments on that front.

Valuation

We value Digi at a TP of RM4.90/share – based on DCF valuation with WACC at 7.7% and long term growth rate of 1.0%. We remain wary of risks to its large migrant base due to price competition, advent of OTT apps and potentially higher traffic charges from the weak ringgit. While dividend yields are fairly attractive at 4.1%, potential upsides are capped by its earnings. We believe the group is fairly valued at an EV/EBITDA of 14.3x, which is close to 1SD above its historical average. SELL.

Source: TA Research - 22 Feb 2017