Digi’s 1HFY12 core earnings were in line with consensus and slightly ahead of our estimates when annualized. However, we retain our forecast for now, as IDD competition is exerting pressure on revenue and cost lines while data growth is facing a new challenge in the form of the bulk SMS ruling. We retain our NEUTRAL call and FV of RM4.07, which is pegged to and have assumed EBITDA margin recovery in FY13 post RAN swap (including the capital distribution recently approved by the High Court). Digi trades on a 19.8x FY13 EPS and 11x EV/EBITDA, which is not inexpensive when stacked against regional mobile peers.
Margin crimped by IDD traffic, handset subsidy. Reversing the impact from site rental accruals in 2QFY12, Digi’s EBITDA margin fell 1%ppt q-o-q to 46%, which management attributed to: (i) the tight handset subsidy arising from the launch of the new Samsung S3 in June, and (ii) the rise in international traffic cost as Digi drove higher IDD volumes to offset price competition in the market, especially from Maxis. Overall, its normalized core earnings made up 45% consensus and 51% of OSK’s estimate. Digi also declared a 5.9 sen/share second interim DPS (1HFY12: 11.8 sen/share) payable on 7 Sept. This represents a payout of 141%, partially funded by the capital management exercise earlier due to the lack of retained earnings.
RM10m hit from lower mobile broadband revenue, SMS ruling. Digi’s data revenue contracted 0.7% q-o-q (+16% y-o-y) as (i) it deliberately slowed the sale of dongles to preserve customer experience during the swap-out to single RAN (Radio Access Network), and (ii) the full quarter impact from the regulator-administered surprise ruling to deregister bulk SMS effective March. We suspect efforts to recover revenue lost from the latter to be challenging, going by the experience of the Indonesian telcos, which were dealt a similar blow in 4Q2011. However, the impact on Digi’s mobile revenue is smaller since revenue from value added services accounts for <5% of mobile revenue.
Network collaboration making good progress. Digi has upgraded 1,980 sites (from 1,647 at end-2Q12) to single RAN and is on track to complete the network swap out to the Huawei kit by end-2012, following which 3G coverage will expand to 70% from 56% currently. The telco’s pact with Celcom on infrastructure sharing is executing well, with completion of site consolidation targeted for 1Q2013.
Nothing new on regulatory developments. The groupsaid there has been no update from the regulators on the allocation of the 2.6GHz spectrum but expects the frequency to be officially awarded by end-2012. It was granted the approval to trial the 1800MHz frequency for LTE, which is a much cheaper alternative given the better propagation characteristics. On access pricing, the original timeline for public hearing has been delayed to 3Q2012.
Source: OSK
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