Digi’s results were in line with our forecast but underperformed street expectations as it ran into network challenges during the quarter which impeded its ability to grow voice revenue. This took us by surprise given Digi’s solid trackrecord of operational execution. While management said the issues are behind, with 4Q12 revenue on the mend, we suspect subscriber experience may have been affected which could hinder stronger revenue recovery. We nonetheless raise our FV to RM5.00 (from RM4.07) after assuming a lower WACC of 9.0% (from 10.5% previously), reflecting the generous dividend and capital management prospects. Digi remains a NEUTRAL, trading at a rich premium to regional peers.
Disappoints. Digi’s annualized 9MFY12 core earnings/revenue were in line, at a 1%-2% deviation from our forecasts. Notwithstanding the seasonally stronger December quarter, the results fell short of market expectations by more than 15%. The group’s EBITDA margin narrowed for the second consecutive quarter to 45.2% in 3Q12 (1HFY12: 47%) from: i) the continuing generous handset subsidy to boost smartphone take-up (24.5% of its base), ii) extended pressure on IDD margins, and iii) network challenges faced during the quarter. Had it not been for better data revenue traction, overall mobile revenue would have contracted during the quarter against the muted 0.2% q-o-q growth (9MFY12: +7.1% y-o-y). This is still a slowdown from the 0.7% registered in 2Q12 and 1.6% 1Q12.
Network swap hits voice capacity. Digi’s mobile voice revenue contracted 1.4% q-o-q (-1% y-o-y) in 3Q12 as it was unable to restore capacity to the desired levels from the network swap, which impeded its ability to grow its voice revenue streams. We gather from management that IDD revenue remains under pressure as the re-pricing in tariffs is not supported by higher traffic, resulting in weaker margins. We think mobile revenue growth will remain under pressure as Maxis carves out a bigger slice of the IDD market.
12sen interim and special DPS. The payout ratio of 298% reflects the up-streaming of cash from DigiTel, approval of which was secured in September. With the latest payout, Digi has exhausted the capital distribution headroom from DigiTel (dividends payable on 7 Dec). We have assumed a dividend payout of 100% in our FY13 forecast.
2013 guidance. Management has issued a preliminary guidance for 2013 of 5%-7% revenue growth (target to outperform market growth of 5%) and sustained EBITDA margin and cashflow, which is not far from its maintained guidance for 2012. Capex is guided at RM700m-RM750m. Digi believes the official award of the 2.6GHz/4G spectrum will be postponed until after the general elections, which we concur. As a result, we expect the commissioning of LTE services by operators to be slightly delayed.
Disappoints. Digi’s annualized 9MFY12 core earnings/revenue were in line, at a 1%-2% deviation from our forecasts. Notwithstanding the seasonally stronger December quarter, the results fell short of market expectations by more than 15%. The group’s EBITDA margin narrowed for the second consecutive quarter to 45.2% in 3Q12 (1HFY12: 47%) from: i) the continuing generous handset subsidy to boost smartphone take-up (24.5% of its base), ii) extended pressure on IDD margins, and iii) network challenges faced during the quarter. Had it not been for better data revenue traction, overall mobile revenue would have contracted during the quarter against the muted 0.2% q-o-q growth (9MFY12: +7.1% y-o-y). This is still a slowdown from the 0.7% registered in 2Q12 and 1.6% 1Q12.
Network swap hits voice capacity. Digi’s mobile voice revenue contracted 1.4% q-o-q (-1% y-o-y) in 3Q12 as it was unable to restore capacity to the desired levels from the network swap, which impeded its ability to grow its voice revenue streams. We gather from management that IDD revenue remains under pressure as the re-pricing in tariffs is not supported by higher traffic, resulting in weaker margins. We think mobile revenue growth will remain under pressure as Maxis carves out a bigger slice of the IDD market.
12sen interim and special DPS. The payout ratio of 298% reflects the up-streaming of cash from DigiTel, approval of which was secured in September. With the latest payout, Digi has exhausted the capital distribution headroom from DigiTel (dividends payable on 7 Dec). We have assumed a dividend payout of 100% in our FY13 forecast.
2013 guidance. Management has issued a preliminary guidance for 2013 of 5%-7% revenue growth (target to outperform market growth of 5%) and sustained EBITDA margin and cashflow, which is not far from its maintained guidance for 2012. Capex is guided at RM700m-RM750m. Digi believes the official award of the 2.6GHz/4G spectrum will be postponed until after the general elections, which we concur. As a result, we expect the commissioning of LTE services by operators to be slightly delayed.
Source: OSK
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