DIGI (FV RM4.00-NEUTRAL) Company Update: Main Bites From CFO Luncheon

Main Bites From CFO Luncheon

We maintain our NEUTRAL rating on Digi following the luncheon with its CFO. While Digi’s execution track record speaks for itself, especially with the commendable quarterly showing vis-à-vis its peers, the telco is showing signs of lethargy and could see greater earnings fallout from a re-energized Maxis. It also faces  retained earnings constraints at the subsidiary level, which  prevents the payout of  special dividends and is not able to capitalise on the  share premium account at the holdco level.  The meeting  did  not  prompt us to  change our forecasts and we have not  incorporated any special payout for FY13. Our FV stays  at RM4.00 (7.5x FY13 EV/EBITDA). TM and Axiata are the better picks for capital management upside surprises.   

Going up against the green man. The takeaways from the luncheon meeting were: (i) rising competitive risks, and (ii) special dividends being a tall order. There were numerous queries on Digi‟s  response to the increasingly  aggressive Maxis, which has just launched its new Hotlink plan (Bagus) and cut IDD rates in an effort to arrest its market share decline. Digi also said special dividends will be a challenge for now as the RM691.9m (8.9 sen/share) share premium reserve at the holding company cannot  be utilized since the cash can only come from its operating subsidiary, DigiTel, from which proceeds are  up-streamed  through  retained earnings to pay dividends. We see downside risks to Digi‟s earnings arising from the more aggressive Maxis as the former has more to lose in the segments that Maxis is apparently targeting – migrant workers and value-conscious customers. Maxis had earlier said it is prepared to do  anything possible to win back customers and restore its market share, which had been incessantly chipped away by Digi, Celcom and to a lesser extent, U Mobile  and  Tune Talk. Also, we sense  marketing lethargy with regard to Digi‟s acquisition and retention campaigns,  which is  a departure from the past when it was a nimble operator and typically led the  market. The company said it will monitor  the  competitive response before making any decision to retaliate as Maxis‟ packages and tariff adjustments were merely a  “normalization” of its legacy packages, which had been priced out of the market.

LTE by  4Q2012. Digi said it can turn on LTE by 4Q2012 should  the company  be awarded the 2.6GHz spectrum by the middle of the year. However, it does not intend to be aggressive with the rollout as LTE devices are still lacking. On the re-farming of the 900/1800Mhz spectrum, Digi offered  very  little updates (as with the other operators) although it is cautiously optimistic  of procuring the lucrative 900MHz band through an auction, to the detriment of its rivals.

Guidance maintained. Digi has reaffirmed its mid- to high single-digit revenue growth target for FY12, stable EBITDA margin and capex of RM700m-RM750m. Its network modernization exercise is slated for completion by end-2012 but management said the

Source: OSK188