This article first appeared in The Edge Financial Daily on July 7, 2017

DiGi.Com Bhd
(July 6, RM5.01)
Maintain hold with an unchanged target price (TP) of RM5.20: We believe DiGi.Com Bhd could see more negative revenue spillover effects in the second quarter ended June 30, 2017 (2QFY17) from rationalising prepaid legacy services.

Prepaid revenue may stay flattish in the second half of FY17 on intense competition, while post-paid revenue continues to grow.

For the long term, DiGi will see big opportunities in the enterprise business by leveraging on an improved mobile network via 4G-900MHz rollouts and bundling of other relevant solutions, though any traction will take time due to binding contracts, in our view.

DiGi aims to sustain its 45% earnings before interest, taxes, depreciation and amortisation (Ebitda) margin in FY17 by containing operating expenditure (opex) increases.

For FY18 to FY20, DiGi is targeting a 1% to 3% opex cut per annum via careful staff hiring, renegotiating vendor contracts by leveraging on Telenor Group’s procurement, transforming work processes, digitising to reduce costs, and transforming network/IT systems to be more software-based, open-sourced and cloud-based.

Despite rapid data traffic increases, DiGi said its network still has ample capacity due to its accelerated 4G network rollouts and fairly high 60% 4G device penetration, while future 2G/3G spectrum re-farming to 4G will also help.

While its FY17 capital expenditure (capex) guidance of about RM700 million to RM800 million is lower versus FY14 and FY15 and is below peers’ (RM1.2 billion to RM1.3 billion), DiGi believes it has a competitive network and is realising greater capex efficiency as part of Telenor Group. Capex will be spent on LTE/LTE-A, fibre roll-outs and IT transformation.

DiGi has completed first-phase rollouts of 4G-900MHz in selected cities and is awaiting regulatory approval to turn on this network. DiGi expects at least a -3dBm improved signal indoors and extended coverage, especially on highways.

DiGi also plans to do three-band carrier aggregation to further boost 4G network speeds. The improved mobile network should help sustain its healthy post-paid revenue growth and market share gains.

Despite intense market competition, DiGi said mobile market consolidation in Malaysia has not happened because the big three telecommunication companies continue to enjoy high Ebitda margins.

DiGi said it may be difficult to find target companies at attractive valuations. Nevertheless, DiGi expects an increase in infrastructure sharing in future, more so when 5G arrives sometime in 2020 (due to more cell-densification requirements).

We keep our “hold” call with a discounted cash flow-based TP of RM5.20 (weighted average cost of capital: 7%).

Structurally, we see DiGi as a beneficiary of the market heading closer to network parity post-900MHz spectrum reallocation.

However, for the short term, we expect subdued earnings due to intense prepaid competition. Its FY17 enterprise value over operating free cash flow of 18.5 times is pricey (Asean average: about 17.3 times), but FY17 to FY19 yields are decent at 4.2% to 4.6% per annum.

Key upside/downside risks are better-than-expected post-paid traction/more intense competition. — CIMB Research, July 5