DiGi.com Bhd
(Feb 10, RM6.43)
Downgrade to hold but raise fair value to RM6.50 per share. We raise our fair value to RM6.50 per share (from RM6.30 per share previously) but downgrade DiGi.Com to “hold” from “buy” as we think valuations are already rich at the current price and fairly reflect its industry outperformance.

DiGi.Com reported a net profit of RM560 million for its fourth quarter of financial year ended Dec 31, 2014 (4QFY14) results, which brought FY14 earnings to RM2 billion. Revenue and earnings before interest, taxes, depreciation, and amortisation (Ebitda) came in at 99% and 98% of our estimates, while net profit came in at 98%, within our and consensus (103% of estimate) expectations.

Service revenues were up 3% year-on-year (y-o-y) in 4QFY14; mobile Internet growth (+38% y-o-y) had more than offset the decline in SMS and voice revenues — DiGi.Com is still the only player to deliver this in the industry so far.

DiGi.Com has been surprisingly aggressive with its long-term evolution roll-out with a 32% pop coverage in FY14 and is targeting 50% pop coverage by end-FY15 (forecasted).

Capital expenditure is expected to be maintained at circa RM900 million (versus our earlier expectation of a slight decline).

For forecasted FY15 (FY15F), DiGi.Com is guiding for low- to mid-single-digit revenue growth and sustained Ebitda margins. This is more or less in line with our projections which have already partly factored in the impact of prepaid goods and services tax pass through. As such, we maintain our projections at this juncture.

The management indicated that industry competition was intense in 4QFY14 with sharply higher advertising and promotions (A&P) cost, and channel commissions, but it thinks this is unsustainable. Maxis Bhd echoes the same sentiment on intense competition in 4QFY14, but guided that FY15F will be reflective of the 4QFY14 A&P spending levels.

 Dialogues on spectrum re-farming are ongoing. DiGi.Com is currently at a disadvantage (for lower band spectrum) and a re-farming could be an opportunity for it to level its holding with the two larger incumbents.

DiGi.Com announced a 7.2 sen per share final dividend (which brought the FY14 dividend to 26 sen per share with a 100% payout ratio) — in line with our expectation.

FY15F dividend yield of 4.4% (also at 100% payout ratio) is attractive relative to falling sector dividends.

Valuations are stretched; it is the most expensive in the sector at 14 times FY15F enterprise value over Ebitda (versus sector average of 11 times) but upside risk could come from dividend upside (if DiGi.Com proceeds with a business trust structure), and spectrum re-farming.— AmResearch, Feb 10

This article first appeared in The Edge Financial Daily, on February 11, 2015.