This article first appeared in The Edge Financial Daily, on February 11, 2016.

DiGi.Com Bhd
(Feb 10, RM4.88)
Maintain buy with a lower target price (TP) of RM5.80: DiGi.Com Bhd’s (DiGi) financial year 2015 (FY15) net earnings of RM1.723 billion are slightly below our expectations, making up 93.5% of our full-year forecast.

FY15 revenue and net earnings declined by 1.5% and 15.2% respectively mainly due to higher depreciation charges and higher direct expenses.

The company has declared its fourth interim dividend of 4.9 sen/share. We revised our FY16 and FY17 earnings forecasts downwards, hence its TP is adjusted to RM5.80.

The Malaysian Communications and Multimedia Commission (MCMC) announced that 900/1800MHz spectrum will be reallocated to Celcom, DiGi, Maxis and U-Mobile.

We believe the higher 900MHz allocation would provide a stronger network quality for indoor coverage.

Total subscribers expanded by 3.9% quarter-on-quarter (q-o-q) ( up 6.2% year-on-year [y-o-y]) to 12.125 million mainly due to strong growth in Internet users (up 14.7% y-o-y).

Q-o-q blended average revenue per user (ARPU) fell to RM44 from RM45 while earnings before interest, taxes, depreciation and amortisation (Ebitda) margin fell from 43% to 40% q-o-q due to the higher cost of goods sold and weaker currency exchange in the quarter.

DiGi’s data revenue surged 6.4% y-o-y and 0.7% q-o-q contributed by a higher Internet usage resulting from stronger data network.

Smartphone penetration has reached 59.2% from 58.4% q-o-q (49.3% y-o-y). DiGi invested RM288 million (FY15: RM904 million) in capital expenditure (capex) primarily in 4G LTE (Long-term evolution) network deployment nationwide. The company has planned to spend a similar amount of capex for FY16.

We reduced our FY16 and FY17 net earnings forecasts to RM1.814 billion (down 8.3%) and RM1.877 billion (down 9.2%) by factoring in a lower ARPU, higher direct cost and depreciation charges.  

DiGi declared its fourth interim dividend of 4.9 sen per share, totalling 22 sen for FY15. We expect the company to pay a dividend of 23 sen for FY16, translating into a yield of 4.6%.

Following the earnings revision, our TP is adjusted to RM5.80 (previously RM6.10) using the discounted cash flow valuation. Maintain a “buy” call. — BIMB Research, Feb 5.