(Oct 21, RM5.82)
Maintain “neutral” with higher target price (TP) of RM5.60: DiGi reported a revenue for the third quarter ended Sept 30 of financial year 2014 (3QFY14) of RM1.76 billion and a net profit of RM486.9 million. Net profit for the nine months of 2014 (9MFY14) of RM1.47 billion was within our expectations and market consensus, making 76% and 75.5% of our and consensus full-year forecasts respectively.
The year-on-year (y-o-y) improvement in 3QFY14 net profit was primarily due to lower depreciation and amortisation expenses of RM126.8 million (3QFY13: RM221.2million) with no accelerated depreciation in 3QFY14 and lower new network depreciation expense. DiGi declared its third interim dividend of 6.2 sen for 3QFY14 (3QFY13: 5.7 sen) or payout ratio of 99.0%.
We maintain our “neutral” call on DiGi with a higher TP of RM5.60 (previously RM5.40) after revising our free cash flow assumptions.Revenue y-o-y growth was driven by data and device sales, and improved profit due to lower depreciation.
DiGi’s 3Q14 service revenue of RM1.58 billion was driven by strong growth in mobile Internet revenue of RM449 million but partly offset by a decline in SMS revenue to RM131 million and voice revenue to RM957 million.
The y-o-y increase in 3QFY14 net profit was due to lower depreciation and amortisation of RM127 million and lower traffic charges of RM359 million, but partly offset by higher cost of goods sold of RM536 million.
Earnings before interest, taxes, depreciation, and amortisation (Ebitda) margin dipped marginally to 44.9%, dampened by lower margin associated with device sales. DiGi net added 442,000 subscribers quarter-on-quarter to a total of 11.3 million lifted by prepaid smartphone bundles and network trial campaigns. Internet subscriber base grew to six million with smartphone penetration increasing to 47%, while data traffic volume surged 89% y-o-y to 14,900 terabytes in 3Q14.
Prepaid and postpaid average revenue per user (ARPU) remained intact at RM41 and RM82 respectively with gains from Internet services cushioning ARPU dilution from declining usage of traditional services such as voice and SMS.
The management believes it is on track to meet its FY14 guidance for revenue y-o-y growth to be at the lower end of 4% to 6% and ebitda margin to be sustained at 2013 level of 45%.
However, the management believes DiGi is well positioned with its modernised network and billing systems to provide relevant services. — PublicInvest Research, Oct 21
This article first appeared in The Edge Financial Daily, on October 23, 2014.