Digi.Com - Continues to explore business trust

We attended Digi’s briefing session yesterday, where the group’s top management presented updates on the company to the analysts present. Digi intends to request the authority to re-assign the usage of its 1.8GHz spectrum in view of the bandwidth having various cost advantages in deploying LTE services as opposed to the current 2.6GHz spectrum. Meanwhile, while management continued to be tight-lipped on its actual LTE rollout time frame, it reiterated that the technology is a vital service for the company’s roadmap going forward. Management also does not rule out the possibility of exploring further the business trust structure, although the details on it have yet to be revealed. There are no changes to our Digi FY13-FY14 earnings forecasts and we have introduced our FY15 earnings forecast. We maintain our OUTPERFORM call on Digi with a target price of RM5.60, based on unchanged targeted FY13 EV/forward EBITDA of 14.4x (+2.0 SD).

Aiming for a better usage of its current spectrum portfolios. The group believed that the recently awarded 2x10MHz in the 2600MHz bandwidth by MCMC is sufficient to deploy its upcoming LTE services. Apart from the 2600MHz bandwidth, the group also has a number of other spectrums, which comprised of the 900MHz, 1800MHz and 2100MHz bandwidths, similar to its industry peers. In view of the various cost advantages that could be enjoyed via deploying LTE services through the 1800GHz bandwidth in contrast to the 2600MHz bandwidth, management intends to request the authority to re-assign the 1800MHz usage (which currently is used for its 2G deployment) to 4G services. The key difference between the 2600MHz and 1800GHz spectrums is that the latter has a wider coverage as well as a higher building penetration rate, which will translate into a significant cost saving in terms of capex spending. Meanwhile, we also understand that management is open for collaboration with other spectrum holders should the opportunities arise.

Targeting to roll out LTE services in FY13. Management has reiterated its intention to roll out its LTE services in FY13, albeit the actual rollout time frame remained vague at this juncture. Based on our earlier understanding, Digi prefers to be the last mobile operator to roll out the service and thus allowed the group to introduce more innovation as well as competitive LTE plans to the market. We understand that Digi is likely to focus on mid/largescreen data (i.e. tablet and notebooks) in its upcoming LTE services.

Continues to explore business trust. Digi indicated that it was still exploring setting up of a business trust to house its assets and extract more cash to further reward shareholders. Management said it is not necessary to list the business trust in the stock exchange, should the framework materialise. Digi also indicated that its net debt/EBITDA could be raised to 1.5x-2.0x. Should the company leverage to these levels, we estimated that Digi could potential unlock RM0.52-RM0.71/share.

Network collaboration saving expected to kick in by FY15. Digi is making good progress on its site sharing and joint-fiber build with Celcom. As for the cost savings, we understand that Digi expects to have an annual combine saving of RM150-RM200m from 2015 onwards with total estimated cash saving of about RM1.1b each over 10 years. We have yet to impute in the above cost savings into our FY15 financial model.

Source: Kenanga