DiGi.Com - 2Q09: Unsustainable premium

2Q09 net earnings declined significantly (-21.4% yoy; -14.9% qoq) and EBITDA margin fell further to 43.3%. Trading at a high premium given its weak market position. Maintain SELL with fair price at RM20.00/share.

1H09 net earnings 3.8% and 7.7% below our and consensus estimates respectively. DiGi.Com (DiGi) reported a lower 2Q09 net profit of RM234.5m (-21.4% yoy; -14.9% qoq), attributed to 3G spectrum cost amortisation and accelerated depreciation charges (up RM25.8m). EBITDA margin declined further to 43.3% from 44.6% in 1Q09, due to higher leased line costs, A&P expenses and doubtful debts. Revenue fell 1.1% qoq, the second consecutive quarterly contraction, affected by weak macro factors and competitive pressure. On an annualised basis, 1H09 revenue fell short of our forecast by 4.5%

Lower net subscriber adds and ARPU. Net subscriber adds for 2Q09 totalled 75,000, 19.4% below 1Q09’s 93,000. This suggests DiGi’s subscriber’s market share could have shrunk by another 0.5-0.75ppt to 24.25 - 24.50% in 2Q09. The previously strong subscriber growth at the postpaid segment tapered off to 0.9% qoq as DiGi ceded market share in the youth and migrant worker segments to mainly Celcom. Blended ARPU fell by another RM2 qoq to RM54, which management attributed to weak macro factors. We expect DiGi to intensify its A&P activities, suggesting significant risks of further EBITDA margin compression. We have forecast EBITDA margin of 42% for 2009.

Insignificant contribution from 3G broadband wireless. DiGi acknowledged that the 3G broadband wireless subscriber base and revenue (undisclosed) were insignificant. Based on other operators’ past records in this segment, we estimate subscriber numbers at less than 20,000. There is no change in annual 3G capex guidance of RM300m-400m for the next 3-4 years. DiGi is expected to launch 3G services for mobile phones (smallscreen) by end-09, which have higher growth potential as compared with 3G broadband wireless services (big-screen).

Maintain SELL with a fair price of RM20.00 (cost of equity of 8.7% and terminal growth of 1%). We remain concerned about DiGi’s declining trends in net subscriber adds, blended ARPU and EBITDA margin. DiGi is trading at a 17% premium to regional peers even though it has limited domestic growth potential and the weakest market positioning among the three celcos.

DiGi has declared an interim single-tier dividend of 49 sen/share, which translates into 75% of net earnings, in line with its dividend policy (net payout ratio of 75%), and constitutes about 48% of our 2009 dividend forecast. Management has guided that the capital structure optimisation exercise would be completed by 2010, which could point to special dividend payouts in 2009-10. As at 2Q09, DiGi is in net debt position of RM173.6m.