Stock Name: DIGI
Company Name: DIGI.COM BHD
Research House: OSK
DiGi.Com Bhd
(May 5, RM22.66)
Maintain neutral call at RM23.10 with target price of RM22.68: There were no surprises in DiGi's 1QFY10 results. Among the notable plus points were the improved prepaid revenue momentum and further opex (operation expenditure) savings contributing to the two percentage points sequential accretion in Ebitda (earnings before interest, tax, depreciation and amortisation) margin.
On the flip side, the management is now guiding for stronger pressure on Ebitda from increased handset subsidies and rising competition. Our forecast is intact. DiGi remains a neutral based on a target price of RM23.10 pegged to an average 5.5 times FY11 enterprise value/Ebitda and 10.5% weighted average cost of capital.
DiGi's 1QFY10 results were in line with core earnings, making up 25%- 26% of ours and consensus full-year estimates. The key operational highlights were: (i) the commendable 6% year-on-year rise in revenue (+3% quarter-on-quarter) versus +1.3% in 4Q09 and +4.4% in 1Q09, alluding to improved mobile revenue traction on the back of the recovery in economic activities and the greater propensity for mobile spending among the foreign workers segment (note that y-o-y revenue growth was the strongest since 3Q08, with prepaid revenue climbing for three consecutive quarters); (ii) opex efficiency; and (iii) the slightly moderated base-case FY10 Ebitda guidance of a "stable" as opposed to "stable to slight increase" as DiGi now expects to incur higher subsidies on the iPhone and/or other smartphones to spur data adoption and growth.
The management has declared a first interim net dividend of 35 sen per share (payable June 18), which translates to a 98% payout.
With the RM250 million MTN raised in 1Q10, DiGi's borrowings increased to RM1.12 billion as at 1QFY10. However, net debt also improved to RM440 million on the back of seasonally low capex or stable net debt/equity of 0.32 time. DiGi has issued fresh net debt/equity guidance of 0.3-0.45 time for the longer-term to be on par with its regional peers. Extrapolating the guidance on forecast Ebitda would translate into an estimated net debt/Ebitda of 0.3 times, which we still consider as conservative. By our estimate, a more aggressive net debt/equity target of 0.6-0.8 times would free up 52 sen-89 sen per share.
DiGi disclosed that the response to its iPhone packages (launched commercially on April 3) has been "phenomenal" but stopped short of revealing the actual metrics (contribution reflected from 2QFY10). As DiGi expenses the cost of the iPhone upfront, the impact on margins will be front-loaded versus its rivals' practice of amortising the cost over the contractual period.
On access pricing, the management's internal assumption is for a downward adjustment in mobile termination rates when the new framework is tabled by end-June although it is inclined to believe that the current access rates would be maintained. - OSK Research, May 5
This article appeared in The Edge Financial Daily, May 6, 2010.
Company Name: DIGI.COM BHD
Research House: OSK
DiGi.Com Bhd
(May 5, RM22.66)
Maintain neutral call at RM23.10 with target price of RM22.68: There were no surprises in DiGi's 1QFY10 results. Among the notable plus points were the improved prepaid revenue momentum and further opex (operation expenditure) savings contributing to the two percentage points sequential accretion in Ebitda (earnings before interest, tax, depreciation and amortisation) margin.
On the flip side, the management is now guiding for stronger pressure on Ebitda from increased handset subsidies and rising competition. Our forecast is intact. DiGi remains a neutral based on a target price of RM23.10 pegged to an average 5.5 times FY11 enterprise value/Ebitda and 10.5% weighted average cost of capital.
DiGi's 1QFY10 results were in line with core earnings, making up 25%- 26% of ours and consensus full-year estimates. The key operational highlights were: (i) the commendable 6% year-on-year rise in revenue (+3% quarter-on-quarter) versus +1.3% in 4Q09 and +4.4% in 1Q09, alluding to improved mobile revenue traction on the back of the recovery in economic activities and the greater propensity for mobile spending among the foreign workers segment (note that y-o-y revenue growth was the strongest since 3Q08, with prepaid revenue climbing for three consecutive quarters); (ii) opex efficiency; and (iii) the slightly moderated base-case FY10 Ebitda guidance of a "stable" as opposed to "stable to slight increase" as DiGi now expects to incur higher subsidies on the iPhone and/or other smartphones to spur data adoption and growth.
The management has declared a first interim net dividend of 35 sen per share (payable June 18), which translates to a 98% payout.
With the RM250 million MTN raised in 1Q10, DiGi's borrowings increased to RM1.12 billion as at 1QFY10. However, net debt also improved to RM440 million on the back of seasonally low capex or stable net debt/equity of 0.32 time. DiGi has issued fresh net debt/equity guidance of 0.3-0.45 time for the longer-term to be on par with its regional peers. Extrapolating the guidance on forecast Ebitda would translate into an estimated net debt/Ebitda of 0.3 times, which we still consider as conservative. By our estimate, a more aggressive net debt/equity target of 0.6-0.8 times would free up 52 sen-89 sen per share.
DiGi disclosed that the response to its iPhone packages (launched commercially on April 3) has been "phenomenal" but stopped short of revealing the actual metrics (contribution reflected from 2QFY10). As DiGi expenses the cost of the iPhone upfront, the impact on margins will be front-loaded versus its rivals' practice of amortising the cost over the contractual period.
On access pricing, the management's internal assumption is for a downward adjustment in mobile termination rates when the new framework is tabled by end-June although it is inclined to believe that the current access rates would be maintained. - OSK Research, May 5
This article appeared in The Edge Financial Daily, May 6, 2010.
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