Digi - next generation LTE network

DIGI: Its 2QFY2013 higher revenue was driven by increasing mobile internet usage. Some 64% of its subscribers are mobile internet users while smartphone penetration stood at 30.4%.

DIGI’s strategy to bundle voice and SMS into its data packages appears to be paying off, offsetting the decline in SMS revenue a subscribers turn, increasingly to messaging apps such as Whats-App. Voice revenue appears to have stabilized.

In tune with the global trend data, data consumption will continue to grow as more users upgrade from feature to smartphones coupled with increasing proliferation of tablet devices. Faster network speed and better consumer experience will further promote data usage. The average data consumption for smartphones is on an upward trajectory.

DIGI is positioned to capture this growth now (July 2013) that it has almost completed its network modernization exercise. The company has expanded its 3G coverage to 72% of the population and it is targeted to reach 75% by end 2013. The joint built fibre, with Celcom too is progressing well with some 1012km completed.

After the same time, the company has also started rollout for the next generation LTE network, beginning with the Klang Valley and it is slated to reach 1500 sites by end 2014.

While DIGI is not expected to excite with a blazing pace of growth, expect the company to report decent earnings expansion going forward. Its strong cash flow would also ensure steady and consistent dividend payments.

At the prevailing price of rm4.63, the stock is trading at lower valuations compared with Maxis and at just a slight premium to M1 and Starhub. Earnings for all telcos are predominantly domestic based whereas Axiata and SIngtel have wider geographical footprints. Overseas expansion offers the potential for stronger growth but also carry higher risks.

Although DIGI’s dividend yield for the current year (FY2013) is comparatively lower, there is a good chance for dividend growth gong forward. Due to the company’s limited reserves (following bumper dividends and capital repayments over the past few years), dividend payments are capped to annual earnings.

Given DIGI’s track record for returning excess cash to shareholders, estimates the company will pay out all of its profits.

Note that should DIGI adopt a business trust structure – a move that is currently (July 2013) – the total dividends payable would likely exceed its existing estimates.

DiGi.Com Bhd is set for higher margins in the second half 2013 with potential for more capital distribution if it adopts a business trust structure.

The ending of additional operations and maintenance expenses relating to network upgrades in second half of 2013 would give a lift to DiGi’s margins. This also sets a higher (margin) base for 2014, and is a catalyst for a re-rating.

At higher levels of payout from DiGi going forward, as its parent Telenor will be making significant investments in Myanmar. There is a high probability that DiGi will take on a business trust structure which will enable it to distribute more capital (as it will benefit Telenor).