DiGi.Com 2Q09 results preview: In a declining mode

DiGi will announce 2Q09 results on 22 July. We expect its revenue to be in a declining trend, contracting 1.0-1.5% qoq, due to shrinking market share and lower ARPU. EBITDA margin is expected at 43-44% with net profit pressured by amortisation of 3G licence cost and 3G broadband rollout services in Penang and Kota Kinabalu.

Shrinking market share and lower ARPU. We foresee its subscriber’s market share to be shaved by another 0.3-0.5ppt to 25-25.2% in 2Q09, mainly losing to Celcom in the youth and migrant worker segments. Celcom has very aggressively promoted an XPAX plan which targets the youth segment, whereas its MVNO partner Merchantrade focuses on the migrant worker segment. Digi’s blended ARPU is expected to decline by RM1 to RM55 in 2Q09, attributed to weaker consumption, and 5% lower than our ARPU forecast of RM57.90 for 2009. These two factors suggest that 2Q09 revenue would contract 1.0-1.5% qoq.

1H09 net profit to come in below consensus, margins still under pressure. 1H09 net profit is expected to be within our expectation but below consensus estimate by 4.1%. We expect EBITDA margin of 43-44% in 2Q09 (1Q09: 44.6%), partly due to price pressure and associated expenses on expanding 3G broadband services in Penang and Kota Kinabalu. Net profit could be further impacted by amortisation of 3G licence cost.

New strategy to stem declining market share. DiGi has just launched two new plans, DG Family plan and Hit1 plan, to strengthen its hold on the family and youth segment respectively. This marks a shift in its marketing strategy from a product-oriented to a segment-oriented approach. DG Family plan allows a primary post-paid subscriber to transfer talktime credit to up to three prepaid supplementary lines and enjoy unlimited free calls, and nationwide SMS and MMS services. Under Hit1 plan, once the user spends a minimum RM1 a day on domestic SMS, he is entitled to flat rates on calls (12sen/min from original 36sen/min), SMS (1sen/SMS from original 10sen/SMS) and a maximum daily charge of RM5 for unlimited mobile Internet use.

These plans are clearly part of DiGi’s defensive strategy to stem its declining share in the prepaid market segment and to capture the growing family and youth segments. However, the impact will only be felt from 3Q09 onwards. Going forward, we foresee the telco sector becoming even more competitive as other competitors launch aggressive call plans. This reinforces our view that DiGi’s EBITDA margin is likely to decline further from 45.1% in 2008 to 42% in 2009.

We expect revenue to contract in 2Q09, its second consecutive quarterly contraction.. EBITDA margin is expected to remain below 45%. Maintain SELL with fair price at RM20.00/share.