DIGI – Fundamental Analysis (27 Apr 2016)

Excel – Download the analysis file

Latest Financial Report – Q1 2016 Financial Report (22 Apr 2016) and Management Discussion And Analysis 1Q 2016

FY16 Q1 Results Highlight:

  • DIGI reported a 16.7% decline in net profit to RM399mn for 1Q16, mainly due to lower device revenue, higher depreciation cost, net interest cost and effective tax rate.
  • Service revenue down slightly but device sales fell sharply. For 1Q16, service revenue dropped 1.8% YoY but device sales delivered a sharper decline of 54.3% YoY as sales volume for smartphones were weaker and DiGi focuses on offering more affordable devices and sim-only packages. Subscriber growth was impressive at 5.5% but blended ARPU dropped from RM46 in 1Q15 to RM42. Postpaid segment recorded a strong subscriber growth of 8.2% while prepaid ARPU reported a larger decline of 10.3% to RM35.
  • EBITDA margin remained stable at 43%. Traffic cost remained elevated, rose 17% YoY due to higher IDD traffic volumes and cost hike from weaker ringgit. Meanwhile, depreciation cost rose 11.6% YoY from continuous investment in stronger infrastructure capabilities. However, EBITDA margin remained stable at 43% due to lower operating cost while COGS was unchanged. Net profit was down 16.7% YoY mainly due to lower sales, higher depreciation and net interest cost. Additionally, effective tax rate increased from 23% to 25%.
  • DIGI reduced its 1Q16 capital spending by -11.4%yoy to RM171m mainly due to heavy capex deployed for 4G LTE network in 4Q15. As at 1Q16, the 4G LTE network has reach 73% population coverage nationwide, backed by 6,700km of fiber network.

Valuation:

In my opinion, fair value of DIGI range from 4.7 to 5.3. Uncertainty risk of fair value is from MEDIUM to HIGH.

DIGI-FY16Q1-Football-Field

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.

Digi’s attractive product offerings and active marketing campaigns has worked in favour of the group as seen in the growth of its subscriber base. However, higher subscriber acquisition cost and lower ARPU has impacted the profit margin. We already can see the intense competition landscape in the market. This would, in turn, lead to subdued earnings growth prospect.

The 2016 guidance remained intact as follows:

  • Service revenue – Sustain at 2015 level
  • EBITDA – Sustain at 2015 level
  • Capex – Sustain at 2015 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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