DiGi.Com Bhd (July 21, RM23.74)

Maintain hold at RM23.66 with target price of RM23.20: DiGi’s 6MFY10 results were within expectations, as revenue and net profit both achieved 51% of our FY2010 estimates. Compared to consensus estimates, DiGi also met expectations as revenue and net profit were at 50% and 51% of FY10 estimates respectively.

6MFY10 revenue rose as its subscriber base expanded, and net profit grew correspondingly on the back of stable margins. On a sequential basis, 2QFY10 net profit was flat as 2QFY10 earnings before interest, tax, depreciation and amortisation (Ebitda) margins dropped 1.3 percentage points (ppts) q-o-q to 43.3%, mainly due to handset subsidies related to the  iPhone (launched in April), partially mitigated by cost savings (which otherwise would have been 2 ppts). Subscriber growth momentum weakened for second consecutive quarter in 2QFY10 as DiGi added 157,000 new subscribers (1QFY10: +227,000) q-o-q to 8.1 million.

DiGi added 102,000 prepaid subscribers to 6.78 million while postpaid subscribers increased 56,000 to 1.33 million. From its total subscriber base, 2.7 million are mobile Internet users of which 122,000 are mobile broadband (dongle) users.

Prepaid ARPU remains under pressure, declining slightly to RM47 (1QFY10: RM48) due to price competition, but postpaid ARPU was stable at RM83 (1QFY10: RM82) due to contributions from the data segment and stable prices.

The second interim net dividend implies almost full payout from 2QFY10 earnings (as similarly seen in 1QFY10).

Given DiGi’s improving cash flow and reiterated guidance for gearing levels at 35% to 45% net debt against 55% to 65% equity, we believe our FY10 dividend per share forecast of RM1.84 or 7.8% yield (130% payout) is achievable as DiGi guided for FY10 capex to be lower than FY09, while there is room to gear up from its current 25% net debt/equity.

We reiterate our hold rating on DiGi and two-stage discounted cash flow-derived target price at RM23.20 (WACC: 6.9%, long-term growth: 2%). DiGi guided that based on the new termination rates of 5 sen/min, the impact will be largely neutral based on existing traffic patterns.

Ebitda margin is expected to stabilise in 2HFY10, while capex will likely pick up to achieve its year-end 3G population coverage of 50% (currently 35%). On the progress of the MoU with Celcom, DiGi expects a successful conclusion to current discussions and should sign an agreement by year-end. The active network collaboration between both parties will lead to substantial opex and capex savings, though DiGi declined to disclose specific numbers.