We lower our FY15-16 EBITDA by 2.6-3.8% to factor in slower service revenue growth and lower margins due to more intense competition. At the core net profit level, we cut our forecasts by 3.5-5.2%. Coupled with higher capex in FY14-15, we lower our target price by 7.9% to RM5.80, which is based on the fair valuation of its potential business trust and return of excess cash. We downgrade DiGi from an Add to a Hold. For Malaysian telcos, we prefer Axiata Group. 

Market competition has intensified in the last six months due to an aggressive U Mobile and a resurgent Maxis, while Celcom has also been more active in the market since Oct after resolving its IT issues. These players have been targeting the youth and overseas foreign workers segments, which are DiGi's traditional strongholds. As a result, DiGi's service revenue growth has already started slowing down in 2Q14 (+2.8% yoy) and 3Q14 (+2.0% yoy). We believe that its rivals will continue to be aggressive in 2015 and this will shave off some of DiGi's service revenue growth potential. While we still expect DiGi to benefit from passing on the 6% GST to its prepaid users, we have trimmed our service revenue growth forecasts to 4.3%/3.6% yoy in FY15/16 (+5.8/+4.7% previously). 

DiGi is guiding for up to RM900m capex this year, higher than its historical RM650m-750m range, to close the 3G coverage gap with Maxis and Celcom. We believe that there is a risk that capex may stay high in FY15 as its rivals are planning to improve the data experience on their networks and accelerate 4G rollouts. As such, we have raised our capex projection for DiGi to RM900m/800m for FY14/15 (RM850m/750m previously). 

DiGi's balance sheet remains very under-leveraged with a net debt/ EBITDA of 0.1x as at end-3Q14. Nevertheless, we believe that DiGi's plans to establish a potential business trust structure is unlikely to materialise in the near term, as we understand that it will need more time to seek all the necessary clarifications to fully understand the implications of a business trust. Due to limited retained earnings, DiGi will only be able to pay out 100% of earnings. This translates into a decent yield of 4.2-4.6% in FY14-16.

Source: CIMB Daybreak - 19 November 2014, Full PDF Report