Company Name: DIGI.COM BHD
Research House: MAYBANK
(April 1, RM22.70)
Maintain hold at RM22.58 with target price of RM23.20: With its initial toehold snugly expanded into a meaningful foothold over the last five years, DiGi is now well-prepared for the next great sprint of a marathon to be a key wireless Internet and data provider.
Our RM23.20 discounted cash flow-based (DCF) target price is based on a weighted average cost of capital (WACC) of 8.3%, risk-free rate of 4%, beta of 0.7 and terminal growth rate of 2.4%.
DiGi's remarkable transformation in the 2005-2009 period when its revenue market share rose from 16 percentage points (ppts) to 26ppts, put into perspective how it is now a meaningful and sustainable third-placed telco.
Despite the many challenges of transition and competition in 2009, DiGi is now well-entrenched to reap a sustainable if not growing share of future mobile revenues.
With its 14.4Mbps High-Speed Packet Access (HSPA) network launched, DiGi can finally offer the full suite of mobile voice and data services that its competitors had a year's head start on.
Smartphones such as the BlackBerry and iPhone are now on offer, whilst capacity and coverage are now in place for DiGi to start competing effectively in the burgeoning non-voice and value-added segments.
Braced for potentially single-digit revenue growth in voice revenues, DiGi is focused on growing future mobile data revenues significantly. Although DiGi is prepared for continued price pressures in mobile Internet, it can be expected to rely on its operational efficiency to ensure generally neutral earnings before interest, tax, depreciation and amortisation (Ebitda) margins.
DiGi quoted various independent sources expecting the mobile broadband market to be worth RM3 billion to RM4 billion by 2013. DiGi's Internet revenue contribution though not likely to be significant in 2010, could be so in 2011.
There are already over 500,000 mobile Internet users at end-4Q09 of whom about 10% are on wireless broadband.
With recent discussions on spectrum refarming, DiGi is potentially a key beneficiary. DiGi has been a relatively efficient user of the limited spectrum available and therefore would seem to be a sensible choice for the award of more spectrum.
This could drive penetration and usage further, but may not happen in the immediate forecast 2010-2012 period.
The recent announcement of RM1 billion in Universal Service Provision funds allocated for the building of various community-focused broadband initiatives is generally positive for the industry.
Aiming for above-industry average growth. DiGi hopes to achieve a better than 5%-6% revenue growth in 2010, assuming gross domestic product growth influences revenue growth the most. Whilst this may be challenging, investors are likely to be pacified by its continued commitment to further active capital management. - Maybank IB, April 1
This article appeared in The Edge Financial Daily, April 2, 2010.