- We downgrade DiGi to SELL (from HOLD) following the announcement
of weak 3Q12 results yesterday, but we raise our fair value to RM4.60/share
(from RM3.50/share) as we roll over our valuation base to FY13F (WACC: 9%).
- DiGi reported a core net profit of RM315mil for its 3Q12, bringing
9M12 earnings to RM960mil. This is broadly inline with our estimates,
accounting for 71% of our FY13F earnings. The results, however, were well below
consensus, accounting for just 61% of street’s full-year earnings of RM1.58bil.
Notably, this is the 2nd consecutive quarter that DiGi has missed
consensus expectations.
- On a sequential basis, earnings were down 3% (revenue: +0.2%
QoQ, EBITDA margins: -2.4pp QoQ) despite 3Q being a seasonally stronger quarter
as DiGi was affected by prolonged post-swap optimisation – voice revenues were
negatively impacted. Estimated revenue impact for the quarter was
RM40mil-RM50mil.
- On the prepaid side, margins were negatively impacted by the
IDD segment (an area where Maxis is aggressively attempting to gain market
share) as well as highly discounted sim packs offered by competitors. In the postpaid
segment, management cautioned about higher handset subsidies by competitors to
drive subs addition, but noted that this will vary by smartphone models and does
not look like a trend, so far.
- A special dividend of 8 sen/share was announced on top of a
4 sen/share interim dividend. With the payment of the special dividend, DiGi
has completed the entire cash payout from the 2 capital management initiatives announced
previously.
- The adoption of a business trust structure may allow for a
sustainable >100% payout ratio going forward. However, based on our
projected FCF of RM1.9bil-RM2bil over the next 2 years, this translates into
dividend yields of 4.5%-4.7% at the current price (and assuming DiGi pays out
all of its FCF as dividends). Telenor’s heavy funding requirements in India in
the near-term suggest that a big chunk of DiGi’s FCF might be paid out as
dividends.
- While admittedly DiGi is a dividend paymaster (given excess
cash) and is expected to post above-average revenue growth, our main concern is
its excessively inflated valuation, amid increased earnings risk from an increasingly
competitive operating environment. DiGi is trading at a 20%-30 premium to
sector. Downward earnings revisions are key de-rating catalysts.
Source: AmeSecurities
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