Re-rating potential for DiGi from wider coverage, GST, biz trust


By Liz Lee

KUALA LUMPUR: While analysts have largely maintained their earnings forecast for Digi.com Bhd, they see a re-rating potential from its coverage expansion as well as potential gains from the implementation of the goods and services tax (GST) and dividend gains from the business trust transition.

Alliance Research said on Tuesday that DiGi, having completed its network modernisation in the third quarter of 2013, will now focus on expanding its 3G coverage, which is at 76% currently, to catch up with Maxis and Celcom.

“It also plans to expand its LTE (long term evolution) coverage to 1,500 sites by end-2014, which is important for DiGi to compete effectively in the medium to long term.”

Analyst Toh Wee Kim said the implementation of GST starting April 2015 could potentially raise DiGi earnings by 8.5% to 11%, assuming all else are equal and the 6% tax on prepaid subscribers is no longer being absorbed.

Hwang DBS Vickers Research concurred that the GST would be beneficial.

“DiGi would gain the most given its higher prepaid revenue contribution. However, the higher cost of consumption would also translate to lower usage from end-users.”

Toh added that despite no further updates for now, it was just a matter of time before DiGi decided to convert into a business trust structure.

“This will enable DiGi to undertake capital management initiatives, optimising its balance sheet that is grossly under-geared relative to peers. Assuming DiGi leverages up to 1.5 times net debt per earnings before interest, taxes, depreciation and amortisation (EBITDA), we estimate this will free up about 50 sen cash per share.”

PublicInvest Research said while DiGi kept to its previous guidance of 5% to 7% year-on-year revenue growth, it lowered its year-on-year EBITDA margin guidance by 1% to 45%. 

“Management dodged queries on business trust, by replying more clarity on regulatory, taxation and telco licensing was needed before a decision can be made. With the completion of DiGi’s network modernisation and 3G population coverage of 76.1%, management is hopeful DiGi can sustain its growth momentum, particularly in the data segment.”

PublicInvest analyst Lee Wee Sieng said: “While we like DiGi for its strong management and execution track record, we are concerned about the increasing competition in the prepaid segment from key mobile players such as Maxis’ bundling free basic Internet with its prepaid subscription and new mobile virtual network operators such as Telin Malaysia (a unit of PT Telkom). 

DiGi’s financial year 2013 third quarter results came in within analysts’ expectations. Net profit was RM448.7mil, 42.3% higher year-on-year mainly due to lower accelerated depreciation and lower effective tax rate. Revenue for the quarter reviewed was up 7.4% from a year ago to RM1.7bil, driven by the growth in data service revenue.

DiGi declared a third interim dividend of 5.7sen or payout of 99% of net profit.

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