Market Access. Results Review 4Q15. M&A Securities. Digi.Com Berhad. Survives the Headwinds BUY (TP:RM5.90) Results Review
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1 M&A Securities Results Review 4Q15 PP14767/09/2012(030761) Digi.Com Berhad BUY (TP:RM5.90) Wednesday, February 10, 2016 Results Review Survives the Headwinds Current Price (RM) New Fair Value (RM) Previous Fair Value (RM) Previous Recommend. RM5.10 RM5.90 RM6.10 BUY Actual vs. expectations. Digi.Com (Digi) closed FY2015 in sombre note despite recording improving operational matrix. 12M15 earnings of RM1.72 billion (-15% y-o-y) came in below from ours and consensus estimates, accounting 86% and 92% of ours and consensus full year estimates respectively. Stripping out forex losses of RM27 million, the adjusted 12MFY15 net profit accounted for about 87% of ours and 94% consensus estimates. The shortfall in earnings was derailed by lower non service revenue (-21.2% y-o-y) as a result of the shifting focus of smartphones sales to service revenue. Dividend. Digi declared final dividend of 4.9 cent vs. 7.2 cent in 4Q14, pushing12m15 dividend to 22 cent vs. 26 cent in 12M14, translating into 99% payout ratio or 4% yield. Topline analysis. Digi made the final push in 4Q15 to stop the deteriorating topline performance on q-o-q basis. The final push helped revenue to close at RM6.9 billion (-1.5% y-o-y), mainly driven by service revenue (+0.2% y-o-y). Service revenue steady was assisted by 1) postpaid revenue (2.8% y-o-y). Cost escalated (+1.3% y-o-y) due to higher depreciation and weaker ringgit. Traffic cost rose 1.2% y-o-y due to weaker ringgit, resulting in higher international termination cost. Meanwhile, depreciation charge also jumped due to network expansion and accelerated depreciation charges relating to data centre migration. As a result, EBITDA margin dropped from 45% in 12M14 to 43% in 12M15. Upside To Fair Value 15% Dividend Yield (FY16) 4.% Stock Code Bloomberg DIGI MK Stock & Market Data Listing MAIN MARKET Sector Telco Shariah Compliance Yes Issued Shares (mn) 7,775.0 Market Cap (RM mn) 42,840 YTD Chg In Share Price -10.7% Beta (x) week Hi/Lo (RM) RM6.65 RM4.86 3M Average Volume (shrs) 11,856mn Estimated Free Float 34.9% Major Shareholders Telenor 49.0% EPF 14.1% ASB 3.2% Postpaid segment. Postpaid service revenue registered positive growth of 2.8% y-o-y and 1.5% q-o-q following the success of intensive 4G-LTE roll-out, attractive 1
2 postpaid packages and on-ground campaigns during the quarter. Postpaid subscriber base strengthened 6.9% y-o-y to 1,840K subscribers, a marked improvement from 1,721K subscribers addition in 12M14 benefiting from Digi LTE network and attractive value proposition and stronger distribution channel whilst ARPU fell by RM1 y-o-y to RM80. Prepaid segment. Digi prepaid service revenue soften marginally to RM4.5 billion (-0.7% y-o-y) derailed by intense products offering in the market. Nevertheless Digi introduced new prepaid pack in 4Q15 and managed to garner solid demand from the market. Prepaid subscriber base trended stronger to almost 10.3 million subscribers with ARPU maintained at RM38. Meanwhile, full year prepaid service revenue remained relatively steady at RM4,573 million although 0.7% marginally lower year-on-year. Internet based was stronger. Internet revenue in 4Q15 stood at RM535 million while 12M15 internet revenue summed up to RM2,077 million (+21.3% y-o-y). The strong acquisition momentum in the final quarter came from stronger prepaid and postpaid campaigns and network expansion opportunities leading to higher subscriber base of 12.1 million, upped 6.2% from a year ago. Leader in 4G LTE network. Digi s 4G-LTE network reached 65% population coverage nationwide, while fibre network expanded to 6,600 km. Outlook. In view of intense competition in FY16, Digi is guiding moderate KPIs growth including mid-single digit service revenue growth, 43% of EBITDA margin and close to RM900 million capex to spend. The high level of capex is continuation of 4G-LTE network rollout to strengthen its postpaid position and capture opportunities from growing internet demand for prepaid. Additionally, the award of 2x5 MHz (from 2x2 MHz previously) of 900MHz and 2x20 MHz (from 2x25 MHz) of 1800MHz band for 15 years with full implementation starting 1st July 2017 is likely reduce Digi capex further. We are positive on the latest spectrum allocation to Digi as the muchneeded additional 900MHz band will not only enhance the group s network coverage but also improve its quality (i.e. to address/partially eliminate its poor in-door signal penetration issue) Change to forecast. We introduce our new FY16 and FY17 forecast. At this juncture, FY16 and FY17 earnings are expected to grow by 9% y-o-y and 2% y-o-y respectively assisted by 1) impact of network modernization that expand its high speed coverage 2) biggest beneficiary of GST 3) higher take up rate in bundled offerings. Valuation. We raise our TP to on Digi at RM5.90 based on last 3-year average EV/EBITDA of 14.6x, and the stock is a BUY. Digi s strong operational metrics and nimble marketing strategy apart from a very attractive dividend payout ratio will push investors to shift its holding into the stocks. Rerating catalyst on the stock will be underpinned by 1) new spectrum award from MCMC 2) completion of its 3G and LTE network expansion. 2
3 Table 1: Peers Comparison Company FYE Div Price EPS (RM) P/E (x) P/B (x) ROE Yield (RM) (%) FY15 FY16 FY15 FY16 FY15 FY16 (%) TP Call Axiata Dec Buy Maxis Dec Hold Digi Dec Buy Telekom Dec Hold Time DotCom Dec NR NR Average Source: Bloomberg, M&A Securities Table 2: Financial Summary YE: Dec (RM 4Q15 3Q15 4Q14 y-o-y q-o-q 12M15 12M14 y-o-y Turnover 1,725 1,675 1,799-4% 3% 6,914 7, % Expenses % 7% -3,945-3,872 2% Other income % -40% % EBITDA % -2% 2,982 3,163-6% Depreciation % -1% % EBIT % -3% 2,354 2,671-12% Finance income % -16% % Finance cost % 3% % PBT % -3% 2,309 2,645-13% Taxation % -2% % PAT % -4% 1,723 2,031-15% EPS % -4% % EBITDA margin 40.7% 42.9% 44.5% 43.1% 45.1% PBT margin 30.1% 32.1% 36.7% 33.4% 37.7% PAT margin 22.2% 23.7% 31.1% 24.9% 28.9% Capex y-o-y q-o-q 4Q15 3Q15 4Q14 Operation matrix chg chg Prepaid Subscribers ( % 4% Net addtion ( % 0% ARPU (RM/month) % 0% Revenue (RM 1,137 1,141 1,192-5% 0% Postpaid Subscribers ( % 4% Net addtion ( % 40% ARPU (RM/month) % -1% Revenue (RM % 2% Source: Bursa Malaysia 3
4 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 FY13 FY14 FY15 FY16F FY17F RM Point RM million Table 3: Financial Forecast YE: Dec (RM FY13 FY14 FY15 FY16F FY17F Turnover 6,733 7,019 6,914 7,237 7,405 Expenses -3,714-3,868-3,945-4,125-4,147 Other income EBITDA 3,042 3,167 2,982 3,131 3,276 Depreciation EBIT 2,164 2,675 2,354 2,452 2,510 Finance income Finance cost PBT 2,140 2,649 2,309 2,495 2,545 Taxation PAT 1,705 2,035 1,723 1,884 1,921 EPS (sen) Dividend - sen Dividend payment (RMm) Dividend payout (%) 97% 99% 99% 99% 99% Retained Earnings PER (x) Price Gross Yield 4.3% 4.2% 4.0% 4.4% 4.4% EV/EBITDA EV (Mkt Cap + Total 38,902 48,500 43,901 43,430 42,351 Debt-Cash) Source: Bursa Malaysia, M&A Securities Digi Share Price vs KLCI (Jan14-YTD) Revenue and Net Profit (FY13-FY17F) ,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000-6,733 7,019 7,237 7,405 6,914 1,705 2,035 1,723 1,884 1,921 Digi FBM KLCI Revenue PAT Source: Bloomberg, M&A Securities 4
5 M&A Securities STOCK RECOMMENDATIONS BUY Share price is expected to be +10% over the next 12 months. TRADING BUY Share price is expected to be +10% within 3-months due to positive newsflow. HOLD Share price is expected to be between -10% and +10% over the next 12 months. SELL Share price is expected to be -10% over the next 12 months. SECTOR RECOMMENDATIONS OVERWEIGHT The sector is expected to outperform the FBM KLCI over the next 12 months. NEUTRAL The sector is expected to perform in line with the FBM KLCI over the next 12 months. UNDERWEIGHT The sector is expected to underperform the FBM KLCI over the next 12 months. DISCLOSURES AND DISCLAIMER This report has been prepared by M&A SECURITIES SDN BHD. Readers should be fully aware that this report is for informational purposes only and no representation or warranty, expressed or implied is made as to the accuracy, completeness or reliability of the information or opinion contained herein. The recommendation and opinion are based on information obtained or derived from sources believed to be reliable. This report contains financial forecast/projection based on our assumptions which may defer from the actual financial results announced by the companies under coverage. All opinions, estimates and assumptions are subject to change without notice. Analysts will initiate, update and cease coverage solely at the discretion of M&A SECURITIES SDN BHD. Investors are to be cautioned that value of any securities invested may fluctuate from time to time. We advise investors to seek financial, legal and other advice for investing based on the recommendation of our report as we have not taken into account each investors specific investment objectives, risk tolerance and financial position. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. M&A SECURITIES SDN BHD can accept no liability for any consequential loss or damage whether direct or indirect. Investment should be made at investors own risks. M&A SECURITIES SDN BHD and INSAS GROUP of companies, their respective directors, officers, employees and connected parties may have interest in any of the securities mentioned and may benefit from the information herein. M&A SECURITIES SDN BHD and INSAS GROUP of companies and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. This report may not be reproduced, distributed or published in any form or for any purpose. M & A Securities SdnBhd (15017-H) (A wholly-owned subsidiary of INSAS BERHAD) A Participating Organisation of Bursa Malaysia Securities Berhad Principal Office: Level 1,2,3 No.45 & 47,43-6 The Boulevard, Mid Valley City, Lingkaran Syed Putra, Kuala Lumpur Tel: Fax: Website: 5
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