DiGi.Com - Capex to stay, competition expected to continue SELL

- We maintain our SELL call on DiGi with an unchanged DCF- derived fair value of RM4.60/share following the release of its 4Q12 results last night. 

- DiGi reported a net profit of RM246mil for 4Q12, bringing FY12 earnings to RM1.2bil. This is within consensus estimates but short of our forecast (90% of our FY12 estimates). However, EBITDA was in-line, accounting for 97% of our full-year projection.

- Net profit (-22% QoQ, -38% YoY) was hit by an increase in accelerated depreciation – totalling RM575mil in FY12 vs. guidance of RM500mil-550mil (RM130mil remaining in FY13F). The tax rate was significantly higher in 4Q12 as there was a retrospective adjustment to prior quarters’ broadband incentives. 

- Additionally, handset subsidies rose in 4Q12, on the back of a 21% QoQ increase in device sales. This was partly owing to:- (1) A spike in demand from Iphone 5 and Galaxy Note 2 launches; (2) Incentives to push out old stocks, i.e. IPhone 4 and IPhone 4S as demand has shifted to IPhone 5. This is likely to continue into 1Q13.

- Revenue grew 6.7% in FY12, which was in-line with DiGi’s KPI, while margins for the full year remained stable (-0.4pp YoY). On a sequential basis, however, EBITDA margin further deteriorated (-0.7ppt) to 44.5%. DiGi is seeing pricing pressure in the IDD segment given aggressive competition, while there was also a small increase in traffic cost in 4Q12. 

- Capex was close to RM700mil in FY12 translating into an 11% capex-to-revenue ratio. Management did not guide for a specific capex for FY13, but expects capex-to-sales to remain relatively similar to FY12. Additionally, management guides that capex is unlikely to fall anytime soon as the group continues to invest in network. 

- On the bright side, DiGi’s network swap is close to completion (targeted by 1H13), which is expected to generate cost savings in terms of elimination of supporting maintenance for the incumbent network. The capacity expansion derived from an improved network now allows DiGi to push more aggressively on tablets and large screen data. 

- Management has set a KPI of 5%-7% revenue growth for 2013, while margins are expected to remain flat. Besides cost savings from completion of DiGi’s network swap, a more efficient distribution network, A&P savings and utilities savings from more efficient network equipment are expected to support margins. Competitive pressure, however, looks set to continue in FY13F, in particular from new players.

- DiGi declared dividend payout of 80% in 4Q12 – prior quarters’ payouts were exceptionally higher owing to payout of proceeds from the past 2 capital management initiatives. Management is only committed to an 80% dividend payout policy going forward.  

Source: AmeSecurities