Digi.Com - Aiming for a higher broadband share

We expect Digi to announce a double-digit YoY net profit growth in its upcoming 3QFY12 results, which is scheduled to be released on 23 Oct, underpinned by higher revenue and a lower effective tax rate. We also expect the company to declare a third interim dividend of 5.9 sen, a similar quantum to that announced in the past two quarters. For the full financial year, we  expect Digi to declare 23.3 sen, translating into a 4.3% dividend  yield. We believe the company is likely to share more on its  data and broadband roadmap during its result briefing given  that the group’s network modernisation plan is now halfway through. Digi believes that the next inflection point of the industry would be strong data revenue growth and this 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 which awaiting the upcoming 3QFY12 result. Our current target price is set at RM5.20, based on an unchanged targeted FY13 EV/forward EBITDA of 12.9x (+3.0 SD). Maintained MARKET PERFORM. 

We expect Digi to record RM330m (+14% YoY) in net profit for 3QFY12. The moderate net profit growth is expected to be underpinned by higher voice and data revenue coupled with a lower effective tax rate as a result of the tax incentives related to its mobile  broadband network facilities. Dividend-wise, we expect the group to declare a 5.9 sen dividend in 3Q12, a similar quantum to that announced in the past two quarters. Note that our 5.9 sen DPS forecast has priced in the partial dividend of 1.67 sen from its RM509m (or 6.5 sen/share) capital distribution plan, which was announced in November 2011. By assuming a 100% dividend payout ratio for its 1HFY12 results, we estimate that Digi would have declared a total of 3.51 sen or 54% out of the abovementioned capital distribution plan.          

More aggressive move in the broadband market. The group’s network modernisation plan, which had started since December 2011, has seen the successful upgrades of more than 2.5k sites to date with an aim to complete the remaining about 3.0k sites upgrade in FY13. The modernized network, which is LTE-equipped, will allow the company to leverage its current network and be ready to deliver fibre-like  speeds to support upcoming LTE mobile devices. With the network modernisation now halfway through, we believe that the group is likely to share more on its data and broadband roadmap during its upcoming result briefing. We understand that Digi is planning to move more aggressively into the broadband market and has shown its intention to shifts its focus from the small and mid-screen (i.e. smartphones and tablets) data market to the large-screen  segment (i.e. broadband) going forward. 

Ample room to grow for data revenue. As of 1H12, Digi’s data revenue accounted for 30.5% of its service revenue (27.5% a year ago). The group has about 2.4m (or 23.5% of its overall subscribers) smartphone customers but its active mobile broadband users only stand at 320k. This suggested that there are ample rooms for Digi’s 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. The group believes that the inflection point for the industry to record another strong data revenue growth could be triggered by branded smartphone prices falling to the range of RM500-RM700, coupled with more affordable subscription plans by the industry players.  

Source: Kenanga