Digi.Com - OUTPERFORM - 29 June 2012

Digi has successfully upgraded more than 1,000 sites to date with an ambition to complete the whole network modernisation plan by year-end. The company is aware that its network upgrading plan had caused some service disruptions to users and has started to compensate some free airtimes to its prepaid subscribers to minimise the dissatisfaction. Meanwhile, its network collaboration with Celcom has been running smoothly with the recent completion of the sharing of the first 200 sites. Digi is targeting to complete all its site consolidation by end-2013 with cost savings to commence as early as 2013 and gradually rising to an average annual saving of RM150-250m after 2015. Digi believes that the next inflection point of the industry strong data revenue growth could be triggered should branded smartphone prices fall to the RM500-RM700 range together with more affordable subscription plans. We are maintaining our FY12-FY14 earnings forecasts with an unchanged TP of RM4.68 based on a targeted FY13 EV/forward EBITDA of 10.8x Maintain OUTPERFORM. 

Network modernisation is on track. The group’s network modernisation plan, which has started since December 2011, has seen the successful upgrades of more than 1,000 sites to date with an aim to complete the 4,000 sites upgrade by end-2012. Digi is aware that its service networks had been disrupted during the upgrading periods and has created some poor user experience to its subscribers. To minimise the dissatisfaction, Digi has started to compensate certain free airtimes to  its prepaid subscribers. We understand that the rationale of Digi to opt for a rapid upgrading strategy for all its sites during a short period instead of spreading the process into phases within a number of years (a strategy implemented by its peers) is to provide a more stable network with higher capacity and cost efficiency within a short period. This will further minimise the gap and enhance its competitiveness vis-à-vis its competitors. Digi has an ambition to secure a capex/sales ratio of a maximum 10% from FY13.  

Network collaboration updates. The group has completed its first 200 sites sharing and is on track to meet its targeted 4,000 sites consolidation and upgrade by 2015. Meanwhile, Digi has also commenced its Phase 1 joint-fibre (50% each for both Digi and Celcom) aggregation and trunk rollout, which is targeted to build ~1000km of fibre cable from the North to the South in West Malaysia. As for the cost savings, Digi expects to see incremental savings as early as 2013 and gradually  rising to an average annual saving of RM150-RM250m after 2015. We understand that the full amount of the cash savings is estimated to be about RM1.1b over 10 years. 

Ample room to grow for data revenue.  The group launched its 3G services in 2Q09, two years after its main competitors, and has since recorded a healthy growth in its data revenue since then. As of 1Q12, Digi’s data revenue accounted for 30.7% of its service revenue. The group has about 2.2m (or 22% of its overall subscribers) smartphone customers but its active mobile broadband users only stood at 315k. This in our view indicates that there are ample rooms for its data revenue to grow going forward. Despite the local market being flooded with ample low to mid-price smartphones that are priced below RM1k, the majority of local consumers are still opting for branded smartphones (i.e. iPhone and Samsung) for profiling purpose. Digi believes that the inflection point for industry to record another strong data revenue growth could be  triggered by branded smartphone prices falling to the RM500-RM700 range  coupled with more affordable subscription plans being launched by the industry players.   

Source: Kenanga