Short-term challenges, long-term opportunities for Digi, says CIMB Research

Digi said its stronger sequential performance and earnings were underpinned by solid postpaid and prepaid internet growth.

KUALA LUMPUR: CIMB Equities Research believes DiGi could see more negative revenue spillover effects in 2Q17 from rationalising prepaid legacy services. 

It said on Thursday that thereafter, prepaid revenue may stay flattish in 2H17 due to intense competition, while postpaid revenue should continue to grow. 

“Longer-term, DiGi sees big opportunities in the enterprise business, by leveraging on improved mobile network via 4G-900MHz rollout and bundling of other relevant solutions, though any traction will take time due to binding contracts, in our view,” it said. 

The research house said DiGi aims to sustain 45% earnings before interest, tax, depreciation and amortisation (Ebitda) margin in FY17F by containing its operating expenditure (opex) increase. 

In FY18-20F, in line with Telenor’s aspirations, DiGi is targeting 1%-3% opex cut per annum through: a) more careful staff hiring, b) re-negotiating vendor contracts by leveraging Telenor Group’s procurement, c) transforming work processes, d) digitising to gradually reduce costs to serve customers and e) transforming network/IT systems to be more softwarebased (SDN), open-sourced and cloud-based. 

CIMB Research said despite rapid data traffic increase, DiGi says its network still has ample capacity due to its accelerated 4G network rollout and fairly high 60% 4G device penetration, while future 2G/3G spectrum re-farming to 4G will also help. 

While its FY17F capex guidance of RM700mil to RM800mil is lower vs. FY14-15 and is below peers’ (RM1.2bil to RM1.3bil), DiGi believes it has a competitive network and is realising greater capex efficiency as part of the Telenor Group. 

Capex will be spent on LTE/LTE-A, fibre rollout and IT transformation. 4G-900MHz ready to be turned on DiGi has completed the first phase rollout of 4G-900MHz in selected cities and is awaiting regulatory approval to turn on this network on July 1. 

Using low-band spectrum, DiGi expects at least a -3dBm improved signal indoors and extended coverage, especially on highways. 

“DiGi also plans to do three-band carrier aggregation to further boost 4G network speeds. The improved mobile network should help sustain its healthy postpaid revenue growth and market share gains (including Enterprise customers), in our view,” it said. 

Despite intense market competition, DiGi says mobile market consolidation in Malaysia has not happened because the Big 3 telcos continue to enjoy high EBITDA margins. 

In addition, DiGi says it may be difficult to find target companies at attractive valuations. Nevertheless, DiGi expects an increase in infrastructure sharing in future, more so when 5G arrives sometime in 2020 (due to more cell densification requirements). 

“We keep our Hold call with a DCF-based target price of RM5.20 (WACC: 7.0%). Structurally, we see DiGi as a beneficiary of the market heading closer to network parity post-900MHz spectrum reallocation. However, in the short-term, we expect subdued earnings due to intense prepaid competition. 

“Its FY17F EV/OpFCF (enterprise value/operating free cashflow) of 18.5 times is pricey (Asean average: c.17.3 times) but FY17-19F yields are decent at 4.2-4.6% p.a. Key upside /downside risks are better-than-expected postpaid traction/more intense competition,” it said.