Buy (from Sell) Digi.com (DIGI MK) Lifted By The Data Wave

Transcription

1 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Vol m Results/Briefing Note, 6 February 2014 Digi.com (DIGI MK) Buy (from Sell) Communications - Telecommunications Target Price: MYR5.60 Market Cap: USD11,359m Price: MYR4.85 Lifted By The Data Wave Macro Risks Growth Value Digi.com (DIGI MK) Price Close Relative to FTSE Bursa Malaysia KLCI Index (RHS) DIGI s 4Q13 results were in line with our expectations. While we see a marginal downtick in revenue growth guidance, we think the telco has fared better than its local peers in monetising data, with above-industry revenue growth expectations and stable margins. We upgrade the stock to BUY with a FV of MYR5.60. We also roll over to FY15 and raise our FY14 forecasts by 10% on incorporating lower depreciation charges Within expectations. DIGI s FY13 core net profit of MYR1,820m (+20.6% y-o-y) was within our (104%) but ahead of consensus (107%) full-year estimates A tight ship. Q-o-q, overall revenue grew 2.0% (3Q13: +2.8%), partly driven by higher handset sales (+6.1%). Service revenue growth was steady, rising 1.8% q-o-q on the back of good data growth (+4.7%) and stable voice revenue. Its 4Q13 EBITDA margin ticked up 1.7 ppts to 46.8% (3Q13: 45.1%) due to strong cost management discipline, but management guided that this is unsustainable. We believe staff costs may normalize while higher device subsidies are likely to materialise going forward. Meanwhile, core net profit jumped 19.1% q-o-q to MYR548m, mainly owing to lower depreciation (-44.9%). Source: Bloomberg Avg Turnover (MYR/USD) 33.6m/10.2m Cons. Upside (%) 0.2 Upside (%) wk Price low/high (MYR) Free float (%) 31 Shareholders (%) Telenor Asia Ptd Ltd 49.0 Employees Provident Fund 14.2 Permodalan Nasional 5.5 Shariah compliant Lim Tee Yang CFA lim.tee.yang@rhbgroup.com Briefing highlights. Management unveiled its 2014 guidance of 4-6% revenue growth, which is above its industry revenue growth estimate of about 4%. DIGI expects its 2014 EBITDA margin to remain stable at 45%. Management reiterated that 2013 was the last year in which the telco enjoyed broadband network-related tax incentives, and expects its 2014 effective tax rate to be closer to the statutory corporate tax rate. Based on management s guidance that the run rate for depreciation in 2014 will likely be similar to that in 4Q13, we expect earnings to go up significantly in spite of its effective tax rate normalising higher. There is no further clarity on the company s proposal to set up a business trust and management has not provided any timeline at this juncture. Dividends. DIGI declared a fourth interim net DPS of 7.0 sen, which translates into a payout ratio of 99%, bringing its YTD DPS to 21.3 sen. We forecast a FY14 DPS of 25.6 sen, assuming a 100% payout ratio. Forecasts and Valuations Dec-11 Dec-12 Dec-13 Dec-14F Dec-15F Total turnover (MYRm) 5,964 6,361 6,733 7,084 7,416 Reported net profit (MYRm) 1,254 1,206 1,678 1,990 2,102 Recurring net profit (MYRm) 1,592 1,619 1,793 1,990 2,102 Recurring net profit growth (%) Recurring EPS (MYR) DPS (MYR) Recurring P/E (x) P/B (x) P/CF (x) Dividend Yield (%) EV/EBITDA (x) Return on average equity (%) Net debt to equity (%) net cash net cash 2.9 Our vs consensus EPS (%) See important disclosures at the end of this report Powered by EFA TM Platform 1

2 Digi.com (DIGI MK) Briefing highlights Outlook. Management unveiled its 2014 revenue growth guidance of 4-6% at the post-results briefing. While this represents a marginal moderation compared to 2013 (+5.9%), DIGI s revenue growth guidance is still above its management s industry revenue growth estimate of about 4%, which is consistent with our estimate of 3-4% for the local cellcos. DIGI has done well to keep voice relatively stable, and we think this would likely remain so in 2014 as management expects current voice pricing to be sustainable, notwithstanding the change in mobile termination rates (effective 1 Jan 2014) to 4.25 sen from 4.63 sen - which it expects to have a minimal impact on margins. Growth will be driven by data, and the company s management will continue to focus on lifting mobile internet growth (FY13: +47.4%) against a backdrop of declining short message service (SMS) revenue (FY13: -13.8%). Mobile internet contributed 58% of DIGI s data revenue (FY12: 45%), and we expect this figure to grow going forward as more efforts are channeled into monetising data. We see further opportunities in boosting mobile internet revenue now that DiGi is able to offer better data network experiences amid a significant rise in smartphone penetration to 38.1% (4QFY12: 26.4%). In addition, management is currently seeing positive trends in higher data consumption, leading to higher data quota demands. The telco expects its 2014 EBITDA margin to remain stable at 45%. DiGi is seeing benefits in operational efficiencies following its network modernisation, and we expect DiGi to reap further cost savings from its collaboration with Celcom. Both parties have jointly rolled out 3,000km of fibre network, and is expected to reach 10,000km in a few years. Management has guided for a higher capex/sales ratio (FY13: 11%), which we believe is due to efforts to expand LTE coverage. It has a target for 1,000 sites by year-end. Tax incentives. Q-o-q, DIGI s effective tax rate remained low at 19.7% (3Q13: 16.7%), thanks to mobile broadband tax incentives. Management said 2013 was the last year in which the telco enjoyed broadband network-related tax incentives, and expects its 2014 effective tax rate to be closer to the statutory corporate tax rate of 25%. For FY14, we are assuming an effective tax rate of 24.5%. Depreciation. Based on management s guidance that the 2014 run rate for depreciation is likely to be similar to that in 4Q13, we expect earnings to rise significantly despite its effective tax rate normalising higher. Management said DIGI s asset base is now smaller (4Q13: MYR1.95bn, 3Q13: MYR1.93bn), though the difference appears only marginal different q-o-q. There was no further clarity on the company s proposal to set up a business trust and management did not provide any timeline. In any case, lower depreciation charges going forward will boost its ability to pay more dividends, which may diminish the need to set up a business trust. Risks The risks include: i) lower-than-expected subscriber net adds; ii) worse-thanexpected voice tariffs; and iii) intense competition. Forecasts Following management s guidance for lower depreciation, we are raising our FY14 EPS by 10.3% to 25.6 sen. We also introduce our FY15 EPS forecast of 27.0 sen. Valuation and recommendation We maintain our view that among the cellcos, DIGI has been doing a better job at monetising data on the back of strong revenue growth helping margins to stay resilient, which is reinforced by management s encouraging 2014 guidance. After rolling over our valuation to FY15, raising our FY14 earnings estimate and lowering our WACC assumption (now 7.1% from 8.5%, TG = 2.0%), we upgrade its stock to BUY (from SELL) with a revised FV of MYR5.60 (from MYR4.10). We think DIGI s revenue growth in 2014 stands out above its local peers on the back of solid data growth, while its FY14 dividend yield of 5% is decent following lower depreciation charges expected going forward. See important disclosures at the end of this report 2

3 Digi.com (DIGI MK) Figure 1: Review of DIGI s 4Q13 results FYE Dec (MYR m) 4QFY12 3QFY13 4QFY13 q-o-q (%) y-o-y (%) FY12 FY13 y-o-y (%) Comments Revenue 1, , , , , Higher q-o-q due to stronger handset sales (+6.1%) and good prepaid revenue growth (+2.3%). EBITDA , , Higher q-o-q due to strong cost management discipline and network modernisation efficiencies. EBITDA Margin (%) Depreciation (360.8) (221.2) (121.8) (44.9) (66.2) (1,329.8) (878.1) (34.0) Lower q-o-q due to the absence of accelerated depreciation. EBIT , , EBIT Margin (%) Interest expense (14.1) (10.1) (9.2) (9.3) (35.1) (51.8) (43.5) (16.1) Total borrowings stood at MYR749m as at 4QFY13 (3QFY13: MYR951bn; 4QFY12: MYR1.08bn). Interest income (13.6) (60.6) (56.4) Pretax profit , , Pretax Margin (%) Tax (114.2) (90.2) (134.8) (385.2) (434.3) 12.7 Effective tax rate (%) (31.7) (16.7) (19.7) (24.2) (20.3) Lower than statutory tax rate due to mobile broadband tax incentives. Net Profit , , Accelerated depreciation (100.0) (100.0) (62.2) Tax impact (40.3) (4.0) 0.0 (101.3) (38.3) Core Profit , , Net Margin (%) Figure 2: Key statistics of DIGI s 4Q13 FYE Dec (MYR m) 4QFY12 3QFY13 4QFY13 q-o-q (%) y-o-y (%) Comments Subscribers (m) - Prepaid 8,823 9,131 9, Postpaid 1,671 1,696 1, Total 10,494 10,827 10, Broadband (3.8) (17.2) Higher q-o-q on the back of a stronger network and retention efforts. Net adds (m) - Prepaid Postpaid Total Broadband (25) (12) (9) ARPU (MYR) - Prepaid Postpaid Blended AMPU (min) - Prepaid (1.7) (2.9) - Postpaid (7.4) - Blended (1.5) (4.1) ARPM (sen) - Blended (7.1) Stable q-o-q despite increased competition in IDD market. See important disclosures at the end of this report 3

4 Digi.com (DIGI MK) Figure 3: Forecast assumptions FYE Dec FY14F FY15F Subscribers (m) - Prepaid Postpaid Total ARPU (RM) - Prepaid Postpaid Capex (MYR m) Source: RHB estimates See important disclosures at the end of this report 4

5 Digi.com (DIGI MK) Financial Exhibits Profit & Loss (MYRm) Dec-11 Dec-12 Dec-13 Dec-14F Dec-15F Total turnover 5,964 6,361 6,733 7,084 7,416 Cost of sales (2,720) (3,137) (2,892) (2,635) (2,743) Gross profit 3,243 3,224 3,841 4,450 4,673 Gen & admin expenses (546) (526) (640) (676) (713) Selling expenses (531) (505) (453) (470) (458) Other operating costs (569) (594) (611) (643) (674) Operating profit 1,597 1,599 2,137 2,661 2,828 Operating EBITDA 2,765 2,929 3,015 3,188 3,367 Depreciation of fixed assets (1,012) (1,175) (723) (451) (464) Amortisation of intangible assets (156) (155) (155) (76) (76) Operating EBIT 1,597 1,599 2,137 2,661 2,828 Interest income Interest expense (66) (52) (43) (45) (45) Pre-tax profit 1,560 1,591 2,112 2,636 2,802 Taxation (306) (385) (434) (646) (701) Profit after tax & minorities 1,254 1,206 1,678 1,990 2,102 Reported net profit 1,254 1,206 1,678 1,990 2,102 Recurring net profit 1,592 1,619 1,793 1,990 2,102 Cash flow (MYRm) Dec-11 Dec-12 Dec-13 Dec-14F Dec-15F Operating profit 1,597 1,599 2,137 2,661 2,828 Depreciation & amortisation 1,168 1, Change in working capital 104 (8) (579) Other operating cash flow Operating cash flow 3,046 3,083 2,436 3,870 3,464 Interest received Interest paid (69) (41) (47) (45) (45) Tax paid (445) (606) (466) (646) (701) Cash flow from operations 2,561 2,480 1,942 3,199 2,738 Capex (604) (699) (741) (779) (742) Other investing cash flow Cash flow from investing activities (603) (698) (738) (779) (742) Dividends paid (1,190) (2,356) (1,306) (1,990) (2,102) Increase in debt (849) 666 (780) Other financing cash flow (171) (166) Cash flow from financing activities (2,209) (1,856) (1,991) (1,845) (2,102) Cash at beginning of period 851 1, Total cash generated (251) (73) (788) 574 (106) Implied cash at end of period 599 1,025 (79) See important disclosures at the end of this report 5

6 Digi.com (DIGI MK) Financial Exhibits Balance Sheet (MYRm) Dec-11 Dec-12 Dec-13 Dec-14F Dec-15F Total cash and equivalents 1, Inventories Accounts receivable Other current assets Total current assets 1,623 1,404 1,279 1,867 1,797 Tangible fixed assets 2,509 2,008 1,947 2,223 2,501 Intangible assets Total other assets Total non-current assets 3,241 2,610 2,473 2,569 2,771 Total assets 4,863 4,014 3,752 4,436 4,569 Short-term debt Accounts payable 1,917 2,091 1,737 2,329 2,438 Other current liabilities Total current liabilities 2,593 2,723 2,434 2,826 2,958 Total long-term debt Other liabilities Total non-current liabilities 859 1, ,106 1,106 Total liabilities 3,452 3,753 3,091 3,931 4,064 Share capital Retained earnings reserve 1, Shareholders' equity 1, Total equity 1, Total liabilities & equity 4,863 4,014 3,752 4,436 4,569 Key Ratios (MYR) Dec-11 Dec-12 Dec-13 Dec-14F Dec-15F Revenue growth (%) Operating profit growth (%) (1.9) Net profit growth (%) 6.5 (3.9) EPS growth (%) 6.5 (3.9) Bv per share growth (%) 4.8 (81.5) (23.6) 0.0 Operating margin (%) Net profit margin (%) Return on average assets (%) Return on average equity (%) Net debt to equity (%) (26.2) (18.0) 2.9 DPS Recurrent cash flow per share See important disclosures at the end of this report 6

7 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Digi.com (DIGI MK) SWOT Analysis Strong reputation in the prepaid and youth markets Market leader in IDD segment Large-screen market a niche area of growth if priced appropriately Low smartphone penetration offers an opportunity to convert subscribers to postpaid with data plans Intensifying competition in the international direct dialing (IDD) segment Weaker MYR against USD can erode IDD margins Irrational price competition Possesses less spectrum in 900Mhz compared to its peers Presence in Malay market is not that strong P/E (x) vs EPS growth P/BV (x) vs ROAE 35 45% % 30 37% % % 21% 14% 6% % 281% 225% 169% 113% 5-2% 20 56% 0-10% 0 0% P/E (x) (lhs) EPS growth (rhs) P/B (x) (lhs) Return on average equity (rhs) Company Profile Digi.Com is the third largest mobile operator in Malaysia. See important disclosures at the end of this report 7

8 NR Digi.com (DIGI MK) Recommendation Chart Recommendations & Target Price Price Close Buy Neutral Sell Trading Take Profit 1.7 Buy Feb-09 May-10 Aug-11 Nov-12 Not Rated Source: RHB estimates, Bloomberg Date Recommendation Target Price Price Sell Sell Neutral Neutral neutral neutral NEUTRAL NEUTRAL NEUTRAL BUY Source : RHB estimates, Bloomberg See important disclosures at the end of this report 8

9 RHB Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage Disclosure & Disclaimer All research is based on material compiled from data considered to be reliable at the time of writing, but RHB does not make any representation or warranty, express or implied, as to its accuracy, completeness or correctness. No part of this report is to be construed as an offer or solicitation of an offer to transact any securities or financial instruments whether referred to herein or otherwise. This report is general in nature and has been prepared for information purposes only. It is intended for circulation to the clients of RHB and its related companies. Any recommendation contained in this report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This report is for the information of addressees only and is not to be taken in substitution for the exercise of judgment by addressees, who should obtain separate legal or financial advice to independently evaluate the particular investments and strategies. This report may further consist of, whether in whole or in part, summaries, research, compilations, extracts or analysis that has been prepared by RHB s strategic, joint venture and/or business partners. No representation or warranty (express or implied) is given as to the accuracy or completeness of such information and accordingly investors should make their own informed decisions before relying on the same. RHB, its affiliates and related companies, their respective directors, associates, connected parties and/or employees may own or have positions in securities of the company(ies) covered in this research report or any securities related thereto, and may from time to time add to, or dispose off, or may be materially interested in any such securities. Further, RHB, its affiliates and related companies do and seek to do business with the company(ies) covered in this research report and may from time to time act as market maker or have assumed an underwriting commitment in securities of such company(ies), may sell them or buy them from customers on a principal basis and may also perform or seek to perform significant investment banking, advisory or underwriting services for or relating to such company(ies), as well as solicit such investment, advisory or other services from any entity mentioned in this research report. RHB and its employees and/or agents do not accept any liability, be it directly, indirectly or consequential losses, loss of profits or damages that may arise from any reliance based on this report or further communication given in relation to this report, including where such losses, loss of profits or damages are alleged to have arisen due to the contents of such report or communication being perceived as defamatory in nature. The term RHB shall denote where applicable, the relevant entity distributing the report in the particular jurisdiction mentioned specifically herein below and shall refer to RHB Research Institute Sdn Bhd, its holding company, affiliates, subsidiaries and related companies. All Rights Reserved. This report is for the use of intended recipients only and may not be reproduced, distributed or published for any purpose without prior consent of RHB and RHB accepts no liability whatsoever for the actions of third parties in this respect. Malaysia This report is published and distributed in Malaysia by RHB Research Institute Sdn Bhd ( M), Level 11, Tower One, RHB Centre, Jalan Tun Razak, Kuala Lumpur, a wholly-owned subsidiary of RHB Investment Bank Berhad (RHBIB), which in turn is a wholly-owned subsidiary of RHB Capital Berhad. Singapore This report is published and distributed in Singapore by DMG & Partners Research Pte Ltd (Reg. No N), a wholly-owned subsidiary of DMG & Partners Securities Pte Ltd, a joint venture between Deutsche Asia Pacific Holdings Pte Ltd (a subsidiary of Deutsche Bank Group) and OSK Investment Bank Berhad, Malaysia which have since merged into RHB Investment Bank Berhad (the merged entity is referred to as RHBIB, which in turn is a whollyowned subsidiary of RHB Capital Berhad). DMG & Partners Securities Pte Ltd is a Member of the Singapore Exchange Securities Trading Limited. DMG & Partners Securities Pte Ltd may have received compensation from the company covered in this report for its corporate finance or its dealing activities; this report is therefore classified as a non-independent report. As of 5 February 2014, DMG & Partners Securities Pte Ltd and its subsidiaries, including DMG & Partners Research Pte Ltd do not have proprietary positions in the securities covered in this report, except for: a) - As of 5 February 2014, none of the analysts who covered the securities in this report has an interest in such securities, except for: a) - Special Distribution by RHB Where the research report is produced by an RHB entity (excluding DMG & Partners Research Pte Ltd) and distributed in Singapore, it is only distributed to "Institutional Investors", "Expert Investors" or "Accredited Investors" as defined in the Securities and Futures Act, CAP. 289 of Singapore. If you are not an "Institutional Investor", "Expert Investor" or "Accredited Investor", this research report is not intended for you and you should disregard this research report in its entirety. In respect of any matters arising from, or in connection with this research report, you are to contact our Singapore Office, DMG & Partners Securities Pte Ltd Hong Kong This report is published and distributed in Hong Kong by RHB OSK Securities Hong Kong Limited ( RHBSHK ) (formerly known as OSK Securities Hong Kong Limited), a subsidiary of OSK Investment Bank Berhad, Malaysia which have since merged into RHB Investment Bank Berhad (the merged entity is referred to as RHBIB ), which in turn is a wholly-owned subsidiary of RHB Capital Berhad. 9

10 RHBSHK, RHBIB and/or other affiliates may beneficially own a total of 1% or more of any class of common equity securities of the subject company. RHBSHK, RHBIB and/or other affiliates may, within the past 12 months, have received compensation and/or within the next 3 months seek to obtain compensation for investment banking services from the subject company. Risk Disclosure Statements The prices of securities fluctuate, sometimes dramatically. The price of a security may move up or down, and may become valueless. It is as likely that losses will be incurred rather than profit made as a result of buying and selling securities. Past performance is not a guide to future performance. RHBSHK does not maintain a predetermined schedule for publication of research and will not necessarily update this report Indonesia This report is published and distributed in Indonesia by PT RHB OSK Securities Indonesia (formerly known as PT OSK Nusadana Securities Indonesia), a subsidiary of OSK Investment Bank Berhad, Malaysia, which have since merged into RHB Investment Bank Berhad, which in turn is a wholly-owned subsidiary of RHB Capital Berhad. Thailand This report is published and distributed in Thailand by RHB OSK Securities (Thailand) PCL (formerly known as OSK Securities (Thailand) PCL), a subsidiary of OSK Investment Bank Berhad, Malaysia, which have since merged into RHB Investment Bank Berhad, which in turn is a wholly-owned subsidiary of RHB Capital Berhad. Other Jurisdictions In any other jurisdictions, this report is intended to be distributed to qualified, accredited and professional investors, in compliance with the law and regulations of the jurisdictions. DMG & Partners Research Guide to Investment Ratings Kuala Lumpur Hong Kong Singapore Malaysia Research Office RHB Research Institute Sdn Bhd Level 11, Tower One, RHB Centre Jalan Tun Razak Kuala Lumpur Malaysia Tel : +(60) Fax : +(60) RHB OSK Securities Hong Kong Ltd. (formerly known as OSK Securities Hong Kong Ltd.) 12 th Floor World-Wide House 19 Des Voeux Road Central, Hong Kong Tel : +(852) Fax : +(852) DMG & Partners Securities Pte. Ltd. 10 Collyer Quay #09-08 Ocean Financial Centre Singapore Tel : +(65) Fax : +(65) Jakarta Shanghai Phnom Penh PT RHB OSK Securities Indonesia (formerly known as PT OSK Nusadana Securities Indonesia) Plaza CIMB Niaga 14th Floor Jl. Jend. Sudirman Kav.25 Jakarta Selatan 12920, Indonesia Tel : +(6221) Fax : +(6221) RHB OSK (China) Investment Advisory Co. Ltd. (formerly known as OSK (China) Investment Advisory Co. Ltd.) Suite 4005, CITIC Square 1168 Nanjing West Road Shanghai China Tel : +(8621) Fax : +(8621) Bangkok RHB OSK Indochina Securities Limited (formerly known as OSK Indochina Securities Limited) No. 1-3, Street 271 Sangkat Toeuk Thla, Khan Sen Sok Phnom Penh Cambodia Tel: +(855) Fax: +(855) RHB OSK Securities (Thailand) PCL (formerly known as OSK Securities (Thailand) PCL) 10th Floor, Sathorn Square Office Tower 98, North Sathorn Road,Silom Bangrak, Bangkok Thailand Tel: +(66) Fax : +(66)