- We maintain our SELL call on DiGi with an unchanged fair value of RM4.60/share.

- DiGi reported a net profit of RM329mil for 1Q13, which accounted for 19% of our forecast and 18% of consensus. However, this has to be taken into context with an accelerated depreciation of RM91mil for the quarter. DiGi still has c.RM60mil accelerated depreciation this year. Earnings should normalise thereafter.

- Revenue growth of 1.1% QoQ was predominantly driven by device sales. Core service revenue was down 1.1% QoQ (+1.2% YoY), dragged by: (1) A shorter month in February 2013; (2) Lower interconnect revenue.

- Operating parameters deteriorated – DiGi saw a net churn in 1Q13. Management attributed the churn to a higher base in 4Q12 (driven by festivities) though we note that this is the first net churn occurring at DiGi since at least the past 4 years (See Chart 1). Prepaid ARPU was down 2.4% YoY and QoQ, while postpaid ARPU was down 3.5% YoY (-1.2% QoQ). Postpaid was impacted by lower minutes, while prepaid was affected by pricing – RPM dropped 6% YOY, 4% QoQ.

- Margins took a hit in 1Q13. EBITDA margin fell 3.3ppts YoY and 0.8% QoQ to 43.7%, due to a higher composition of device sales (10.4% of revenue, 4Q12: 8.4% of revenue) and lower margins from the IDD segment – Bangladesh raised termination rates effective 19 March 2013. If normalised for acc. depreciation and exceptionally higher tax rates in 4Q12, earnings would have been largely flat QoQ (vs. reported +34% QoQ).

- 3G network coverage is targeted to expand to 75% (pop. coverage) from 68% currently. DiGi plans to ride on this network expansion to expand into the lower-end, secondary markets, which will come with ARPU dilution.

- Management declined to disclose explicit capex guidance, but guided that group intends to maintain operational cash flow margin (32%) and EBITDA margins (46%) as FY12’s. On our estimates, this translates into c.RM738mil FY13F capex, a 5% rise vs. FY12 capex of RM700mil. While DiGi plans to roll out 4G-LTE from end-2Q13, 3G network remains very much relevant as the development of the 4G ecosystem will take time.

- There is limited scope for dividend upside, as even with a gradually normalising depreciation rate, FY13F earnings would be barely sufficient to match last year’s dividend payout. Management indicated that it has depleted its ability to undertake a >100% payout, following the past 2 capital management initiatives. We assume a 100% dividend payout ratio this year, which translates into a yield of 4.7% (FY13F).

Source: AmeSecurities