Digi.com - Upside potential from 3G broadband wireless remains remote

Optimistic on broadband wireless potential but... Management is upbeat on broadband wireless on a longer-term horizon, although the segment is crowded with players like Celcom, Maxis, P1, Redtone and TM (fixed broadband). New players such as YTL e-Solution, U Mobile and Wi-Net Technology are expected to enter this market in the near to medium term. Management thinks wireless broadband revenues have the potential to reach RM3b -4b in 4-5 years, but Digi’s 3G broadband revenue is only expected to be significant from 2011. Going forward, however, we think margins and tariffs of 3G broadband will come off substantially as more players can enter the market by riding on the HSBB infrastructure being built by TM.

Management has reiterated that it has no intention to increase capex for 3G (RM300m-400m) in 2009. No number has been disclosed on 3G broadband wireless subscribers acquired since the service was launched in Mar 09. … expect weak 2Q09 results. Indications are that 2Q09 revenue trend would be similar to 1Q09’s qoq pace of contraction, as a weak economy has lessened mobile phone usage by the lower income group. Thus, 2Q09 earnings could be lower than our and consensus estimates. Margins and tariffs are also under downward pressure, stemming from aggressive promotional programmes from Celcom.

Meanwhile, Digi’s corporate market share dipped to 25.5% in 4Q08 from the peak of 28.4% in 2Q07, based on revised figures published by the Malaysian Communications and Multimedia Commission (SKMM). It was only able to capture 16.7% of new mobile subscribers in 4Q08. We expect its market share to continue shrinking by another 0.5ppt in 1Q09. We believe the company would eventually need to accelerate its 3G roll-out and A&P programmes in order to stem its shrinking market share trend. Intensity of competition has also increased significantly as Malaysia’s mobile penetration rate has crossed the 100% mark (100.1% in 1Q09), coupled with implementation of the Mobile Number Portability (MNP) framework.

In an MVNO JV to target niche market. DiGi has entered into an MVNO JV agreement with Baraka Telecom (JV has an authorised paid-up capital of RM10m) to target Middle Eastern travellers in Malaysia. The MVNO agreement is conditional upon Baraka Telecom obtaining all relevant licences and approval from SKMM. We note, however, that only 173,000 Middle Eastern tourists visited Malaysia in 2008, which is not significant enough to have any meaningful impact on Digi’s subscriber base growth and earnings. Nevertheless, we think this is part of DiGi’s measures to mitigate its falling corporate market share.