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This article first appeared in The Edge Financial Daily, on October 27, 2015.

 

DiGi_table_FD_27Oct15_theedgemarketsDiGi.Com Bhd
(Oct 26, RM5.53)
Maintain buy with an unchanged target price (TP) of RM7.04:
Subsequent to DiGi.Com’s claims of having the widest 4G long-term evolution (LTE) coverage to date, it is seeking to add more value to their services by adding voice-over  LTE (VoLTE) on its 4G LTE network. DiGi is also currently experimenting on the viability of providing voice-over WiFi and LTE Advance.

There are several advantages of implementing VoLTE. These include better network experience, which is six times more efficient than 2G and three times more efficient than 3G, crystal clear audio quality with noise cancellation and high-definition (HD) voice calls, faster call connection, and faster connection speed enabling simultaneous browsing, downloads and streaming.

We view DiGi’s bold statement of having the widest 4G LTE network positively as it is a testament to DiGi’s commitment to further improve its subscriber services. Should the roll-out take place next year, DiGi would be the first mobile network operator (MNO) to roll out VoLTE in Malaysia. There could potentially be a boost in new subscribers from the roll-out of VoLTE. However, note that regionally, Singapore’s MNOs already have VoLTE services since the second quarter of 2014.

There is a possibility that users might need to pay more with VoLTE. This could help battle the decrease in average revenue per user (ARPU). DiGi’s ARPU has been under pressure since 2013, decreasing to RM46 from RM48 in 2013. This is in line with the general industry trend.

VoLTE potentially requires both participants to have 4G smartphone and 4G coverage. However, at present, the coverage of 4G is not as widespread as 2G and 3G. This means that VoLTE calls will not always be available. Also, if the user moves out of the 4G coverage during the call, there is a high chance that the call will drop. Pricing may also be an issue as MNO may charge a higher fee. However, we view that all these problems could be transitory as 4G coverage continues to increase, users progressively upgrade to 4G smartphones, prices stabilise, and networks aligned their technology.

DiGi is our top pick in the mobile subsegment. DiGi possesses a strong management team. Based on the historical track record, the group has managed to compete with its peers despite its subservient position in the spectrum allocation domain. This is shown in its ability to move in tandem with market demand, especially the prepaid segment. Furthermore, the latest earnings’ result has shown that there is an encouraging growth in the post-paid segment, which is usually dominated by its peers. On another note, the stock offers a higher dividend yield of more than 5% compared with its peers.

We advise investors to take this opportunity to further increase their shareholdings in DiGi as we believe there could be a further upside to their future earnings should the company manage to roll out VoLTE service according to its plan. All in, we reiterate our “buy” recommendation on DiGi with an unchanged TP of RM7.04 per share based on the dividend discount model valuation methodology.— MIDF Research, Oct 26

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