We attended Digi’s 2019 Analyst Day. Key takeaways include: 1) management reiterated the strategy and focus of driving growth from the more sustainable internet & digital revenue, 2) progress with the B2B segment has been encouraging and there is more room for growth especially from SMEs with supportive measure for the digitisation of business operations in Budget 2020, 3) the employment of data analytics have facilitated enhancement of network experience in an efficient manner with nationwide network net promoter score up 3% YoY, 4) the group is taking a phased approach in the expansion of its fibre to the home services. In all, we reiterate our Sell recommendation on Digi with an unchanged TP of RM4.25/share based on a WACC of 7.5% and longterm growth rate of 1.0%. We opine that the stock is fairly valued at current levels, trading at an EV/EBITDA of 13.8x CY20 EBITDA which is in line with the stock’s 5-year mean.

Focus on Sustainable Growth, Digitisation & Simplification

Management reiterated Digi’s strategy and focus on driving growth from the more sustainable internet & digital revenues versus noninternet revenue (i.e., voice) while also improving customer experience and increasing efficiency via digitisation and the simplification of processes. Recall that in 9MFY19, Digi’s 3.3% decline in service revenue was mainly due a 25.8% fall in non-internet prepaid revenue (on the back of falling legacy revenue) but largely cushioned by an 8.5% growth in postpaid and non-internet prepaid revenue which thereby improved its mix of internet & digital revenue further from 55% to 63% of service revenue. The strategic shift in revenue mix was supported by on-going efforts to redefine its customer value proposition which has seen enhancements to network experience supplemented by value offerings like easy device ownership (PhoneFreedom 365), borderless and family plans, affordable internet passes, as well as personalised rewards and convenience via the MyDigi app to promote subscriber retention.

B2B Segment Gaining Traction

Management also highlighted that progress to drive growth from the B2B segment has been encouraging with customers including big names like Petronas, Heineken, and foodpanda as well as SMEs. On top of conventional mobile services, other solutions offered by Digi include Omni (a virtual phone system), iFleet (a fleet tracking service), and altHR (an all-in-one digital HR solutions) which are designed to help businesses increase their efficiency and productivity. While contributions from the B2B segment is still smallish, management sees more room for growth especially from SMEs which account for 98.5% of businesses in Malaysia and in view that they would benefit from supportive measures in Budget 2020 to promote the adoption of digitalisation in their business operations (i.e., the government will provide a 50% matching grant of up to RM5,000 per company for the subscription of services including electronic Point of Sale systems, enterprise resource planning, and electronic payroll systems).

Initiatives to Enhance Network Experience

Meanwhile, management alluded that initiatives to enhance the network experience of Digi’s subscribers have been fruitful. The analysis of data obtained from marketing, network and other crowdsource platform has provided the group valuable insights for the efficient expansion of its 4G coverage into targeted areas (thus also ensuring efficient capex spend) and for the improvement of efficiency and quality of existing sites. Testament to these efforts, from January to September 2019, the improvement in Digi’s download speed by 28.5% to 30.2Mbps and network latency by 19.6% to 41ms translated to a 3% YoY improvement in its nationwide network net promoter score. Apart from these efforts, we also note that the group is open to further collaboration with industry players for the expansion of its fibre capabilities and network as being done with Celcom and TM Global. And for 5G, the group will be actively involved in establishing and nurturing use cases during the 6-month trial period from October 2019 to March 2020.

Fibre to the home: Taking a Phased Approach

As for the expansion of the group’s FTTH services, management said that Digi has been taking a phased approach in expanding its services. They also see the expansion of FTTH services to help offload data and voice from the mobile network when customers are connected to WiFi and this in turn, would also help improve the network experience for all customers. Thus far, the group has successfully completed pilot projects in Melaka (with TNB) and Klang Valley and recently commercially launched its services in Sabah (with Celcom Timur). And like peers, the group has been working on offering customers bundled propositions, namely with the bundling of postpaid and fixed broadband services.

Impact

We make no changes to our earnings forecasts.

Valuation & Recommendation

In all, we reiterate our Sell recommendation on Digi with an unchanged TP of RM4.25/share based on a WACC of 7.5% and long-term growth rate of 1.0%. We opine that the stock is fairly valued at current levels, trading at an EV/EBITDA of 13.8x CY20 EBITDA which is in line with the stock’s 5-year mean. Besides, we also opine that Digi’s FY19/FY20/FY21 forward dividend yields of 4.0%/4.2%/4.3% are not attractive enough to warrant an entry considering the downside risk of continued challenges from its prepaid segment.

Source: TA Research - 29 Oct 2019