WIder network: The 800MHz, along with Digi's existing 1,800MHz and 2,600MHz spectrums will enable it to better serve customers who are increasingly consuming video content.
KUALA LUMPUR: CIMB Equities Research expects Digi’s service revenue to fall 2%-3% on-quarter and on-year in the first quarter of 2017 (1Q17) due to more intense competition and lower IDD revenue.
It said on Tuesday Digi’s earnings before interest, tax, depreciation and amortisation (Ebitda) margin could rise 0.6 percentage point on-quarter (lower handset subsidies) and two to three percentage points on-year due to IDD tariff rationalisation (since 2Q16) which has removed loss-making traffic.
“Hence, Ebitda could fall 2% on-quarter, but rise 3% on-year from 1Q16's low base. Core EPS may rise 6% on-quarter (assuming tax rate normalises) but flat on-year (higher depreciation and interest cost). Dividend payout ratio should be 100%,” it said.
CIMB Research said DiGi's prepaid revenue has been declining on-quarter since 1Q15 due to intense competition, lower IDD usage and prepaid-to-postpaid migration.
It believes this trend will persist in 1Q17 as recent prepaid competition has been intense among the Big Four players, even though IDD tariff competition has eased.
Given the greater perceived value in postpaid (with big data quotas), it also expects the prepaid-to-postpaid migration trend to continue.
“For FY17F, we expect prepaid revenue to decline 5% on-year,” it said.
The research house pointed out DiGi’s postpaid subs/revenue have grown robustly since 4Q15/1Q16 on improving 4G coverage and attractively-priced plans.
“We see this being sustained into 1Q17. Still, we would be watching out for any impact from the Celcom FIRST plans (gained traction in 3Q-4Q16) and MaxisONE revamped offers (Nov 2016).
“For FY17F, we see postpaid revenue growing 10% (FY16: +10.2%) as DiGi gains a larger market share due to its improving network, more so after the 900Mz spectrum reallocation in July 2017,” it said.
CIMB Research said it will be watching DiGi’s traffic cost trends. The ringgit eased 2.8% on-quarter (-5.7% on-year) vs. US$ but DiGi (and other industry players) have been raising headline IDD tariffs to the main migrant workers’ call destinations (e.g. Indonesia, Nepal). Hence, it expects this to cover the higher traffic costs without affecting margins.
“We expect operational and maintenance costs to gradually rise on-quarter through FY17F as DiGi's network expands. Sales & marketing and handset subsidies should be lower on-quarter due to seasonality,” it added.
CIMB Research also noted that DiGi has guided for a lower capex of c.RM685mil to RM800mil (11%-13% of service revenue) in FY17F vs. RM800mil to RM900mil per annum in the last three years (ex-FY17F's savings from fixed asset register review).
“We will track 1Q17's capex as well as the investment focus areas. We think DiGi will shift its focus to expanding the current 41% 4.5G coverage (4G coverage is already high at 85% at end-2016), and further extend its fiber transmission network.
“Maintain Hold and DCF-based target price of RM5.20 (WACC: 7.0%). While DiGi’s FY17F enterprise value/operating free cashflow of 19.1 times is relatively pricey (Asean average: c.18.1 times), it is supported by FY17-19F dividend yields of 4.1%-4.4% per annum.
"Key upside/downside risks are better-than-expected postpaid traction/more intense competition,” it said.
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