DIGI - re-rating

Observers see a re-rating potential from its coverage expansion as well as potential gains from the implementation of the goods and services tax (GST) and dividend gains from the business trust transition.

DiGi, having completed its network modernisation in the third quarter of 2013, will now (Oct 2013) focus on expanding its 3G coverage, which is at 76% currently (Oct 2013), to catch up with Maxis and Celcom. Management is hopeful DiGi can sustain its growth momentum, particularly in the data segment.

It also plans to expand its LTE (long term evolution) coverage to 1,500 sites by end-2014, which is important for DiGi to compete effectively in the medium to long term.

The implementation of GST starting April 2015 could potentially raise DiGi earnings by 8.5% to 11%. DiGi would gain the most given its higher prepaid revenue contribution. However, the higher cost of consumption would also translate to lower usage from end-users.

It is also matter of time before DiGi decided to convert into a business trust structure. This will enable DiGi to undertake capital management initiatives, optimising its balance sheet that is grossly under-geared relative to peers.

While DiGi is liked for its strong management and execution track record, observers are concerned about the increasing competition in the prepaid segment from key mobile players such as Maxis’ bundling free basic Internet with its prepaid subscription and new mobile virtual network operators such as Telin Malaysia (a unit of PT Telkom).