DIGI – Fundamental Analysis (27 Oct 2015)

Fundamental Analysis as of FY14 – http://www.slideshare.net/lcchong76/digi-fundamental-analysis-fy14

Excel – http://1drv.ms/1S8GZ8d

Latest Financial – Q3 2015 Financial Report (26 Oct 2015) http://www.bursamalaysia.com/market/listed-companies/company-announcements/4901553

Management Discussion And Analysis 3Q 2015 – http://disclosure.bursamalaysia.com/FileAccess/apbursaweb/download?id=188655&name=EA_FR_ATTACHMENTS

FY15 Q3 Results Highlight:

  • Digi reported 3Q15 earnings of RM396.6m, a decline of -18.5%yoy. Excluding forex impact of +RM37m, normalised PAT came in at RM433.6m. This represents a decrease of -10.9%yoy which was mainly caused by higher progressive depreciation from network expansion and accelerated depreciation of RM26m relating to migration of data centre.
  • Service revenue for current quarter (“3Q 2015”) remained resilient and fairly stable at RM1,584 million against preceding quarter (“2Q 2015”) of RM1,589 million amid intense price competition and weak consumer sentiment. Device and other revenue trended lower for the quarter and contributed to sequentially lower overall revenue of RM1,675 million (2Q 2015: RM1,723 million). As a flow through from margin compression from price competition, increased traffic and foreign exchange (“forex”) cost from unfavourable forex movement (3Q 2015: RM4.40 vs. 2Q 2015: RM3.77 against USD), EBITDA moderated to RM719 million (2Q 2015: RM788 million). Consequentially, profit before tax leveled to RM537 million (2Q 2015: RM626 million) after accounting for progressively higher depreciation from network expansion.
  • DIGI provided a full analysis of the Group’s prospects up to 31 December 2015 in the “Management Discussion & Analysis“.
  • 26 Oct 2015 – Digi mulling Voice-over-LTE (VoLTE) services in 2016
    • Digi would be the first mobile network operator (MNO) to rollout VoLTE in Malaysia
    • There is a possibility that users might need to pay more with VoLTE. This could help battle the decrease in average revenue per user (ARPU). Digi’s ARPU has been under pressure since 2013, decreasing to RM46 from RM48 in 2013.

Valuation:

  • 5-Y DCF:
    • Good Scenario (9.0% – 11.0%): From 6.27 to 6.74 (Uncertainty Risk: LOW to MEDIUM)
    • Base Scenario (6.0% – 8.0%): From 5.61 to 6.04 (Uncertainty Risk: MEDIUM)
    • Bad Scenario (3.0% – 5.0%): From 5.02 to 5.41 (Uncertainty Risk: HIGH to VERY HIGH)
    • Ugly Scenario (-1.0% – 1.0%): From 4.31 to 4.65 (Uncertainty Risk: VERY HIGH)
    • At current price (5.25), based on RDCF, assumption of FCFF growth rate in the next 5 years is 4.5%.
  • Absolute EY%:
    • Trailing:
      • FY14 (EPS: 0.261) – 6.209 (Uncertainty Risk: MEDIUM)
      • R4Q (EPS: 0.244) – 5.809 (Uncertainty Risk: MEDIUM)
    • Forward:
      • FY15 (EPS: 0.252 ± 5%) – From 5.694 to 6.294 (Uncertainty Risk: MEDIUM)
      • FY16 (EPS: 0.263 ± 5%) – From 5.936 to 6.561 (Uncertainty Risk: MEDIUM)
    • EPS applied to reach the current stock price (5.25): 0.221
  • Industrial Average EY%:
  • Trailing:
  • FY14 (EPS: 0.261) – 6.24 (Uncertainty Risk: MEDIUM)
  • R4Q (EPS: 0.244) – 5.84 (Uncertainty Risk: MEDIUM)
  • Forward:
    • FY15 (EPS: 0.252 ± 5%) – From 5.72 to 6.32 (Uncertainty Risk: MEDIUM)
    • FY16 (EPS: 0.263 ± 5%) – From 5.96 to 6.59 (Uncertainty Risk: MEDIUM)
  • In my opinion, fair value of DIGI range from 6.0 to 6.3.
  • image

    Going Forward:

    Digi possesses a strong management team. Based on the historical track record, the group has managed to compete with its peers despite its subservient position in the spectrum allocation domain. This is shown in its ability to move in-tandem with the demand of the market, especially the prepaid segment. Furthermore, latest earnings result has shown that there is encouraging growth in the post-paid segment which is usually dominated by its peers. On the other hand, aggressive price competition as well as pressure on consumer wallet has impacted the mobile network operators.

    The 2015 guidance remained intact as follows:

    • Low to mid single digit service revenue growth
    • Sustain EBITDA margin and Capex similar to 2014 level

    I will continue to hold this share, and accumulate it.

    At the time of writing, I owned shares of DIGI.

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