25 July 2012
Summary of Analyst Report: Digi target price RM 4.05, Underperform - CIMB Research
Revenue and depreciation surprises were behind DiGi's first half (ended June 30) core net profit shortfall of 5% relative to our forecast and 9% relative to market.
The company's revenue was hit by a ban on bulk short-messaging service (SMS) and its decision against selling wireless broadband while competition in international direct dialling (IDD) service is eating into its margins.
The 5.9 sen dividend per share (142% payout) for the second quarter was within expectations and was higher than last year's 3 sen (99% payout).
We have cut financial years 2012 to 2014 earnings per share but raised our discounted cashflow target price for a lower weighted average cost of capital of 10.7% (previously 11.6%) to reflect its high dividend payout, which has improved capital structure efficiency.
But DiGi is still an “underperform” call for us due to stiff IDD competition.
Meanwhile, DiGi's service revenue inched up only 0.8% quarter-on-quarter due to a ban on bulk SMS and its decision not to offer the lower-yielding wireless broadband which dented revenue.
While earnings before interest, taxes, depreciation and amortisation (EBITDA) margin was reduced by 1 percentage point, IDD competition had little impact on DiGi's revenue.
DiGi is benefiting from good price elasticity in the IDD space where lower prices have stimulated usage but have resulted in higher international traffic costs.
Also, DiGi's voice usage is being cannibalised by over-the-top applications such as Viber and WhatsApp.
Despite higher IDD usage, minutes of use were unchanged quarter-on-quarter in the second quarter, after falling 1.5% in the first quarter.
Lastly, its revenue and EBITDA growth rates are rapidly slowing.
In our core net profit, we have deducted RM24mil accruals that were written back.
Not surprisingly, DiGi noted that IDD is seeing stiff competition from the mobile virtual network operators, U Mobile and Maxis.
Competition is also intense in bundled offerings with pressure on handset subsidies.
DiGi may have to raise its marketing costs to counter rising competition and defend its market share.
DiGi has maintained its guidance of mid-to-high single-digit revenue growth versus industry revenue growth of mid-single-digit growth, an unchanged EBITDA margin year-on-year, and capital expenditure of RM700mil to RM750mil.
Chief financial officer Terje Borge had hosted an investors briefing in conjunction with the results announcement.
There were no major surprises and most of the questions centred on the competition in both IDD and product bundling, its ability to maintain its growth and updates on its network swap-out and collaboration with Celcom.
We are lowering our financial years 2012 to 2014 core net profit estimates by 4% to 7% after shaving our revenue forecasts for the weaker-than-expected revenue and raising our estimates for depreciation and amortisation.
Our dividend per share estimates are also revised downwards by 4% to 8%.
We believe that DiGi's revenue will remain under pressure due to competition in the IDD segment.
Maxis is intent on capturing its fair share of the market, which places substantial risks on DiGi, which derives about 20% of its revenue from IDD.