This article first appeared in The Edge Financial Daily on October 19, 2017

KUALA LUMPUR: DiGi.Com Bhd’s net profit fell 12% year-on-year (y-o-y) in the third quarter ended Sept 30, 2017 (3QFY17), as announced on Tuesday, but the results are “within expectations” of analysts who cover the company.

However, one of them said DiGi still stands to “fare better” against its competitors if it gets a chunk of the government’s 700MHz spectrum allocation, up for tender soon.

“DiGi is playing catch-up with Maxis Bhd, although probably not with Axiata Group Bhd, as Celcom Axiata Bhd (a unit of Axiata) for the past few quarters has been lagging behind Maxis and DiGi in terms of network quality,” AllianceDBS Research telco analyst Toh Woo Kim told The Edge Financial Daily.

“DiGi had acquired the new 900MHz spectrum, so they are working hard to improve their coverage, especially for indoor [penetration of] buildings. Moving forward, they will continue to roll out better coverage, meaning we can expect higher adoption of data under DiGi’s brand,” Toh said.

DiGi activated its 900MHz spectrum for 4G long-term evolution on July 1 this year, and within three weeks, it said the 900MHz spectrum had covered 15% of Malaysia’s population, including 51 cities and towns.

Last Thursday, the Malaysian Communications and Multimedia Commission (MCMC) announced it is welcoming tenders for spectrum blocks under the long-awaited 700MHz spectrum, said to have wider reach and better indoor penetration. The application will be opened from Oct 31 to Jan 2, 2018.

The MCMC said it would tender out 2x400MHz of the 700MHz spectrum. The upfront price for a 2x5MHz block is set at RM215.5 million based on a one lump-sum payment option and with three other instalment options. The annual fee is RM18.5 million during the 15-year validity period starting in January 2019.

“Highlights for the telecom (telecommunication) sector next year include the 700MHz spectrum allocation. DiGi definitely has greater financial capacity to acquire more spectrum compared with Axiata, in particular,” said another analyst who declined to be named.

“Now that MCMC is opening up tenders for the 700MHz spectrum and if all players in the sector have equal participation, then DiGi will have the upper hand due to its stronger balance sheet versus those of its peers,” the analyst added.

As at Sept 30, 2017, DiGi had cash and cash equivalents of RM660.81 million, almost double the RM331.22 million it had a year earlier.

DiGi posted a 12% y-o-y decline in its net profit for 3QFY17 to RM384.62 million, from RM438.38 million as prepaid service revenue fell, while revenue dropped to RM1.57 billion from RM1.62 billion. It also declared a tax-free dividend of 4.9 sen a share, which will be paid out on Dec 22.

“While prepaid market conditions remain challenging, exacerbated by declining legacy [of the] prepaid voice and messaging services, our focus on accelerating the prepaid Internet growth and solidifying our Malaysian subscriber base resulted in stabilised prepaid revenue quarter-on-quarter at RM919 million while y-o-y decline has narrowed,” it said.

For the first nine months of financial year 2017, DiGi said net profit contracted to RM1.12 billion from RM1.26 billion a year earlier, while top line declined to RM4.7 billion from RM4.93 billion.

“The latest results are within our expectations as well as DiGi.Com’s guidance. It’s worth noting that prepaid revenue has stabilised, although the company reported lower prepaid subscribers, especially from the migrant worker segment,” Toh said.

“Overall, 3QFY17 was better because in the previous quarters, earnings were decreasing due to steep declines in voice revenue, insufficiently mitigated by the increase in data revenue,” he added.

Meanwhile, the unnamed analyst said that moving forward, competition in the telecom sector — dominated by Maxis, Axiata and DiGi — still poses a risk to DiGi.

“The telecom market is very much saturated in Malaysia. I don’t see the big players registering any exciting growth from the telecom space. Growth will be rather flat,” the analyst said.

“Further, DiGi could face margin compression with more competition coming in. U Mobile Sdn Bhd, though it is not publicly listed, could get its fair share of the 700MHz spectrum and they can do more [in terms of expansion] with what they might gain.”

DiGi closed 1.24% or six sen higher at RM4.89 per share, with a market capitalisation of RM37.94 billion.