DiGi reported a stronger 2Q13 net profit of RM380.0m (+17.2% y-o-y, +15.6% q-o-q) which accounted for 23.3% and 22.1% of our and consensus full-year forecasts respectively. We consider DiGi’s 2Q13 net profit to be within expectations as its net profit is projected to improve further in 2H13 on completion of its network modernisation and lower accelerated depreciation expenses. Its 2Q13 revenue grew to RM1.65bn (+4.6% y-o-y, +0.4% q-o-q), helped by 15.8% y-o-y growth in data service revenue to RM515m. DiGi declared a second interim dividend of 4.8sen or payout of 98% of net profit.

Revenue driven by service revenue. DiGi’s 2Q13 service revenue of RM1,526m (+3.8% y-o-y, +3.4% q-o-q) was driven by strong growth in mobile Internet & broadband revenue of RM293m (+53.4% y-o-y, +10.6% q-o-q) but partly offset by decline in messaging revenue to RM172m (-11.8% y-o-y, -6.0% q-o-q), while voice revenue remain resilient at RM1,011m (-1.4% y-o-y, +3.4% q-o-q). Device & other revenue declined 25.7% q-o-q to RM127m amid higher proportion of sales in mid-to-lower priced devices sold during the quarter.

Lower accelerated depreciation and higher q-o-q EBITDA margin. Net profit improved in 2Q12 mainly due to lower accelerated depreciation (2Q13: RM46m, 1Q13: RM91m, 2Q12: RM145m). EBITDA margin of 45.2% (+1.5% q-o-q) was driven by 23.6% q-o-q decline in cost of materials (e.g. handset) and improved operating cost efficiency.

Subscribers net addition of 176k and ARPU intact. Operationally, its total subscriber base as at end-2Q13 was 10.55m (+1.7% q-o-q, +3.1% y-o-y). DiGi recorded a q-o-q net gain of 176k of subscribers in 2Q13, driven by prepaid segment. Notably, its mobile internet subscriber base jumped to 6.79m (+16.3% q-o-q, +25.4% y-o-y) or 64.4% of total subscribers, helped by bundling of internet for prepaid subscribers. 2Q13 ARPU remained intact with RM83 for postpaid subscription and RM42 for prepaid subscription (highest in the last four quarters).

Expecting stronger 2H13 numbers. Management is sticking to its previous guidance of 5%-7% revenue y-o-y growth and EBITDA margin of 46%, expecting the positive q-o-q growth momentum to continue into 2H13. We believe DiGi will deliver stronger results from 2H13 with lower accelerated depreciation expense and less handset/device subsidies. Management is still exploring the business trust structure and will submit its proposal/decision to the shareholders by the end of the year.

Maintain Outperform. We maintain our Outperform call on DiGi with an unchanged 12-month target price of RM5.40 using discounted cash flows valuation. We believe DiGi currently offers an attractive riskreward proposition at the current price level. Its projected dividend yield of 5.0% (FY14F) will also provide support for its share price. In light of its strong free cash flows, low gearing and DiGi’s parent Telenor winning the Myanmar telco license (need cash flows to fund capex), we believe DiGi will be more pro-active to increase its dividends to its shareholders.

Source: PublicInvest Research - 22 Jul 2013