DIGI.COM BHD (DIGI) 07/02/2014. TELECOMS INFRA AND NETWORK Ownership:

Transcription

1 DIGI.COM BHD (DIGI) 7/2/214 Financial Year: Dec-213 Latest Quarter: 31/12/213 Price: 5. Stock Category: Investment Grade Board: Main Board FBMKLCI: YES Industry: INFRASTRUCTURE PROJ Sub-Sector: TELECOMS INFRA AND NETWORK Ownership: - Corporate Owned (Local) SERVICES L. C. Chong is NOT an investment advisor nor a financial advisor, and no information provided here is to be interpreted as a suggestion to buy or sell securities. All figures in thousands of Ringgit Malaysia except per share values and ratios Click here to understand definition of some financial terms Prepared by: L. C. Chong Website: L. C. Chong Page 1 of 6

2 DIGI.COM BHD FY Latest Rolling 4 Quarter Results CROIC ROIC 2, 1,5 1, Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Turnover Net Profit EPS PER SHARE VALUE (CENTS) Gross Profit Margin Net Profit Margin Revenue and Earnings 8, 6, 4, 2, Revenue EBIT Net Income Balance Sheet 6, 5, 4, 3, 2, 1, Total Assets Total Liabilities Total Equity Cash Flow 2,5 2, 1,5 1, Valuation FCF/Sales Debt Coverage (FCF) DCF 3-Y 5-Y 1-Y Good 19% Base 15% Bad 11% Ugly 7% EY% Valuation R4Q-EPS FY14-EPS FY15-EPS Buy Under Sell Above Absolute P/E R4Q-EPS FY14-EPS FY15-EPS Fair Value Buy Under Cash Conversion Cycle Debt/Equity Operating Owner Earnings

3 Financial Highlights Performance of FY213 - DiGi's full-year net profit climbed to RM1.71 billion from RM1.21 billion a year earlier. Revenue was higher at RM6.73 billion versus RM6.36 billion. - For FY213, prepaid revenue grew 5.2% to RM4,4 million (: RM4,183 million) while postpaid revenue grew 1.4% to RM1,732 million (: RM1,78 million). - The Internet revenue has risen by 43.8% y-o-y and 8.7% q-o-q on the back of improved data speed and usage, rising mobile Internet subscriptions and higher smartphone penetration to 38.1%, DiGi said. - CROIC and ROIC are above my benchmark and consistently growing throughout the years. - NPM and FCF/Sales are above my expectation, but NPM of DIGI is going slight down trend since 27. This is mainly contributed by higher cost of sales and capex. - Cost of goods sold ( COGS ) increased by 15.% y-o-y and 4.3% q-o-q from higher handset related expenses and traffic cost. The weakening of MYR has also resulted in higher IDD traffic cost. - Since, ARPU decreased from 59 to 48 (). This is in line with the Internet For All mission. DiGi has introduced more entry-level and mid-end smartphone bundles to drive greater internet adoption in the market. The consistent internet-focused marketing activities gained traction, with stronger positive net adds of 279K subscribers, leading to 1.8 million subscribers. Although, incessantly expanding its reach to new and secondary markets, blended ARPU remained resilient at RM48. This was attributed to DiGi s relentless drive on relevant product offerings delivered through good distribution network to the market. MI ARPU continued to rise with additional smartphone adoption as well as increasing MI demand on supplementary devices such as tablets that brought incremental ARPU per account. - DIGI is highly leveraged, but its free cash flow is able to repay of all of its debts. DIGI is a fat cash cow! Performance as at DIGI reported a 123% jump in fourth quarter net profit from a year earlier as revenue rose on higher subscriber base and Internet income. - Lower depreciation and amortisation upon completion of network modernisation, and less finance expenses had also supported profit rise. - Net profit jumped to RM million in the fourth quarter ended December 31, 213 (4QFY13) from RM million. Revenue rose to RM1.73 billion from RM1.63 billion. - EBITDA margin and PAT (profit after tax) margin rose to 47% and 32% respectively as a flow-through from lower device subsidies, improved underlying OPEX to revenue and discontinuation of accelerated depreciation upon completion of network modernisation. - During 4QFY13, DiGi's subsriber base comprising prepaid and postpaid customers expanded 4.8% to 11 million f li M bil I t t b ib 16% Economic Moats Economic Moats: Narrow Cost Advantage - Lower ARPU if compare to MAXIS and CELCOM. However, DIGI got the highest net profit margin. Switching Costs

4 - Nowadays, changing Telco is piece of cake. However, good coverage service will retain subscribers longer. - DIGI coverage is still not as good as MAXIS and CELCOM, but DIGI makes great efforts to improve their network. - Since Jun 213 (after they upgraded few thousands of stations), I have much better experience in using their data services, and I am no longer experience call drop while driving. Network Effect - Statistics shows that DIGI subscribers are increasing over the years. Still got room of improvement. Intangible Assets Not available or no moat found Efficient Scale Not available or no moat found Growth Drivers & Risks/Challenges Growth Drivers - Cost savings from partnerships. - Managed services / outsourcing. - Increased demand for wholesale bandwidth. - Opportunity calls with GST - The likely introduction of the goods and services tax (GST) should be positive for the mobile carriers as they would no longer have to absorb the 6% sales tax for prepaid users. DiGi would benefit the most as 71% of its revenues are prepaid vs 58% at Celcom and 55% at Maxis. The sector and our stock calls remain a Neutral across the board despite this potential development as the impact would be limited. Assuming that the telcos are able to recover only half the tax since we think that some consumers would reduce their usage when GST is imposed, we estimate a 3-6% lift for CY15 core net profit and 3-5% for target prices. - Expect 4G LTE on the 18MHz band to be utilised in 214. Trial sessions are currently ongoing, though full commercial rollout would require further optimisation due to DiGi s lack of 9Mhz spectrum to offload 2G and 3G traffic to. - DiGi is actively working on acquiring more lower-band spectrum, whether via purchase or on a leased basis. We think there may be some challenge here, due to the lack of spectrum on sale in the market currently, though it is also communicating with the regulator on coming to a solution. - Main priorities for the operator are currently to fully complete and iron out kinks in its network modernisation, as well as drive 3G coverage expansion, which is expected to hit at least 75% by end In Q3 213, DiGi has expanded its 3G population coverage extensively to 76.1% ahead of schedule, and continuously narrowing the gap with its 2G coverage. Concurrently, the network has also been equipped with HSPA+ nationwide while gradually extending LTE coverage to other parts of Malaysia. - DiGi is also expanding its tablet range to include low-to-medium-end tablets, much like its new strategy to offer medium-priced handsets in order to drive tablet usage as well as promote its 4G LTE tablet offerings. - While the company is still tight-lipped on its business trust proposal, I believe this could be an additional sweetener which could further unlock the value of the company. - DiGi has extended its network collaboration with Celcom Axiata for an additional three years from 18 Jan 14. The first collaboration began in 211. During the tenure, the intention of the network collaboration agreement has been successfully implemented in phases and both parties have been able to realise the opportunities and benefits of collaboration in a inclusive and sustainable matter. (Jan 214) - With its full scale modernised network, I view that the company to be in a better position to capture larger b b b h l l d f h ll l f h

5 Risks/Challenges - Potential irrational competition, especially in the prepaid segment - Potential margins pressure as a result of the higher customer acquisition costs (via heavy handset's subsidies) - Higher marketing costs to retain market share which may further pressure profitability - Regulatory risks - regulation of tariffs - FOREX - The weakening of MYR has also resulted in higher IDD traffic cost - Unable to monetize data - Dumb pipes - Operators like DIGI and Maxis cannot offer their traditional services (such as downloads of wallpapers, ringtones, games, applications, etc.) as Apple controls the total iphone user experience.

6 Strategy My View: - Fair values: - 5Y DCF: EY%: Absolute PE: DY%: All models indicate that DIGI is either overvalued or fully valued. - The outperformance of 4Q13 was mainly due to lower-than-expected depreciation and taxes. I am not sure whether this is something recurring for long term. - With Internet subscribers increased by 14.5% and blended ARPU increased by a modest 2.1% to RM48, I am quite positive with DIGI future prospects. - However, I believe that DIGI is currently fully (or nearly) valued. - The last time I accumulated DIGI was in Jul 213 at Thus, I won't accumulate DIGI for the time being. Portfolio Strategy: Lump Sum + Top Up Averaging Down Method: - Dollar Cost/Value Averaging Portfolio Execution: - Buy and Monitor - Momentum BUY1;BUY2;BUY3;BUY4;BUY5;B Buying Basis: EPS QoQ Growth > 15% Price is below Intrinsic Value (DCF) Price is below Intrinsic Value (EY%) Price is below Intrinsic Value (Absolute PE) Price is below Intrinsic Value (ERM) Price is below Intrinsic Value (DY%) Stock price breaks out of consolidation/dip on an uptrend. Company owner/directors, and major fund institutions heavily buying ELL6;SELL7;SELL8;SELL9;SELL1;SELL11;SELL12;SELL14;SELL18 Selling Basis: Quarterly EPS drop for 3 consecutive months. Price has risen too far from its intrinsic value (DCF) Price has risen too far from its intrinsic value (EY%) Price has risen too far from its intrinsic value (Absolute PE) Price has risen too far from its intrinsic value (ERM) Price has risen too far from its intrinsic value (DY%) Long term trend changed from bullish to bearish Company owner/directors, and major fund institutions heavily selling Fundamental of business turns unattractive or bad (bear cases) The current price is 3% away from my average holding price. Other good reasons stated in MorningStar's article. L. C. Chong Page 6 of 6