AmWatch - DiGi.Com : Data gaining strong traction post modernisation BUY, 18 Jul 2014

STOCK FOCUS OF THE DAY

DiGi.Com : Data gaining strong traction post modernisation          BUY

We maintain BUY on Digi with a higher DCF-derived fair value of RM6.30/share (vs. RM5.80/share previously). Digi reported core earnings of RM499mil for 2Q14 - bringing 1H14 core net profit to RM984mil. This is ahead of our forecast – accounting for 110% of our FY14F earnings, if annualised, and 104% of consensus. 

Key deviation was lower than expected depreciation rate, while top line growth was also stronger than expected at 5% YTD growth vs. our earlier 4% revenue growth assumption for FY14F. We have adjusted lower our depreciation assumptions and raised our revenue growth assumption (to +5.6% YoY), which is closer to the higher end of management guidance of 4%-6% to reflect the stronger-than-expected 2Q14 result. Our FY14F-16F earnings are raised by 9%-16%. The upward earnings revision also raises our dividend forecast, which is pegged at 100% payout ratio. Dividend yield now stands at 4.7%.

Internet revenue rose 40% YoY in 2Q14, which more than offset a moderation in voice (-4% YoY) and SMS revenues (-17% YoY). This suggests that Digi’s strategy to attract new data users and stimulate usage from existing low data users via the introduction of bite-sized data plans is gaining strong traction.  Secondly, the subscriber decline seen in 1Q14 (-1% QoQ) was reversed in 2Q14 (+0.2% QoQ) given the strong take-up of smartphone bundles.

The 1800 MHz and 900 MHz spectrum are up for renewal early next year. At this point, management expects a status quo in its spectrum holding. However, should there be a re-farming or a re-bidding exercise, Digi would have the opportunity to level out its holding with peers in these bands and this could be a positive for the group. Valuation is decent at 21x, trading below its historical average PE of 25x.

Others :

Bonia Corporation : Adjusting for bonus issue and share split      BUY

Bursa Malaysia : 2QFY14: Another 20 sen special dividend             BUY

Pavilion REIT : AEIs progressing smoothly                                              HOLD

Capitamalls Malaysia : Stable earnings amid weaker rental trends at Sungei Wang Plaza  HOLD

QUICK TAKES

Boustead Heavy Industries : Formalising LCS contract after  2½ years       HOLD

CIMB Group : Softer non-interest income for CIMB Thai in 2Q     HOLD

Plantation Sector : Key takeaways from RSPO’s presentation      NEUTRAL

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