AmWatch - Digi.Com : Better platform for monetization, but increased competition seen BUY, 21 Oct 2014

STOCK FOCUS OF THE DAY

Digi.Com : Better platform for monetization, but increased competition seen     BUY

We reaffirm BUY on Digi at an unchanged fair value of RM6.30/share. Digi reported core net profit of RM487mil for its 3Q14, which brought 9M14 core earnings to RM1.47bil. This is broadly within expectations.

EBITDA and topline both accounted for 73% of our FY14 estimate. We think 4Q14 could show stronger momentum given the introduction of new smartphone models i.e. the Iphone 6 and Note 4, on top of subs growth seen in 3Q14. Topline growth of 4% in 3Q14 was at the lower end of guidance of 4%-6%. Digi cautioned of increased price competition in voice and data. This, besides its billing system migration, caused EBITDA margins to shrink slightly to 45% in 3Q14.

However, subs growth was still gaining momentum and we think this better reflects Digi’s positioning in the market instead of mere topline growth. Earnings were quite weak in 3Q14 (-2% QoQ, albeit up by 9% YoY), due to a major migration to a new converged billing system..

Positively, it improves Digi’s ability to monetise its modernised network better as it allows it to:- (1) deliver more flexible pricing and product structure in its bundles; (2) improve lead time to support go-to-market launches; (3) support dynamic charging functionalities; (4) enable better customer insights which helps improve granularity in market segmentation approach in marketing and product positioning; and (5) optimise cost structure – but no clear guidance was given on expected savings.

Digi announced interim dividends of 6.2sen/share (9M14: 18.8sen/share), which is a 99% payout ratio vs. 9M13’s 96%. Capex intensity is expected to be maintained at 10%-12% of revenue in FY15F.

Despite increasing competition, we like Digi for stock specific reasons: (1) Biggest beneficiary of GST; (2) Much better ability to monetise subs via a modernised network; (3) Biggest beneficiary of affordable smartphone introductions; (4) Potential beneficiary of spectrum refarming; and (5) 3G data coverage expansion.

Others :

Bursa Malaysia : 3QFY14: Trading activities remain robust              BUY

Yinson Holdings : Extension of Knock Adoon charter        HOLD

NEWS HIGHLIGHTS

Malaysia Airports Holdings : Eyeing full control?

WCT Holdings : Plans to buy land in Serendah

Tan Chong Motor Holdings : SC nod for RM1.5bil notes

Property Sector : Rehda: GST will push up home prices by 2.6%

DISCLAIMER:

The information and opinions in this report were prepared by AmResearch Sdn Bhd. The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of AmResearch Sdn Bhd may from time to time have a position in or with the securities mentioned herein. Members of the AmInvestment Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice.