PP 7767/09/2010(025354)

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

R e su l ts / B ri e f i ng N o t e
21 July 2010
MARKET DATELINE

Digi.Com Share Price

Fair Value
:
:
RM23.66
RM25.70
No Surprises Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (DIGI; Code: 6947) Bloomberg: DIGI MK

Net Core EPS Net
FYE Turnover profit EPS EPS# Growth# PER# C.EPS* P/NTA Gearing ROE NDY
Dec (RMm) (RMm) (sen) (sen) (%) (x) (sen) (x) (x) (%) (%)
2009 4,909.6 1,000.5 128.7 128.7 (13.4) 18.4 - 12.1 0.6 65.8 4.4^
2010f 5,271.9 1,080.7 139.0 139.0 8.0 17.0 137.7 13.4 0.6 78.8 5.9
2011f 5,627.8 1,185.2 152.4 152.4 9.7 15.5 145.0 13.1 0.6 84.6 6.4
2012f 5,947.8 1,250.9 160.9 160.9 5.6 14.7 156.0 12.9 0.6 87.9 6.8
# Excludes exceptional items ^Excludes special DPS
Main Market Listing / Non-Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

RHBRI Vs. Consensus

♦ In line. Digi’s reported 1H10 net profit of RM556.7m (+9.2% yoy) came in Above
within our and consensus expectations, accounting for 51.5-52.0% of our In Line
and consensus full-year estimates. Below

♦ 2Q revenue rose 3.5% qoq to RM1,335.1m, largely driven by higher Issued Capital (m shares) 777.5
minutes of use (blended MOU, increased by 6% qoq to 240 minutes) and Market Cap (RMm) 18,395.7
net adds. Net profit, however, stayed flat qoq mainly due to lower EBITDA Daily Trading Vol (m shs) 0.5
52wk Price Range (RM) 20.188 – 23.70
margin (-1.3%-pts qoq due to higher handset subsidies) and net finance
Major Shareholders: (%)
costs (+16.1% qoq), which offset the higher topline.
Telenor Asia Pte Ltd 49.0
Postpaid net adds increased to 56k from 35k in 1Q10 and this was mainly EPF 16.2
due to continued reduction in churn. Prepaid net adds, on the other hand,
declined to 102k from 1Q10’s 192k mainly due to higher rotational churn.
FYE Dec FY10 FY11 FY12
On the other hand, Broadband net adds increased to 45k in 2Q10 (34k in EPS chg (%) - - -
1Q10). All in, Digi added 158k subscribers (2Q09: 75k; 1Q10: 227k). Var to Cons (%) 1.0 5.0 3.1

Despite prepaid MOU increasing by 8% qoq to 192 mins in 2Q10, prepaid PE Band Chart
ARPU declined marginally to RM47 (1Q10: RM48) and this was mainly due
to lower ARPM, which declined to 22sen/min (1Q10: 24sen/min) on the
PER = 16x
back of pricing pressure. Postpaid ARPU, on the other hand, improved to PER = 14x
RM83 (1Q10: RM82) thanks to stronger MOU (+2% qoq) and ARPM. PER = 12x

♦ Declares 2nd interim dividend. Digi declared a 2nd interim single-tier

DPS of 35 sen, which translates to a net yield of 1.5% and a payout ratio
of 98%. The entitlement date for the 2nd interim dividend is 30 Aug 10
while payment date is 24 Sep 10. Relative Performance To FBM KLCI

♦ Risks. The risks, in our view, include: 1) weaker-than-expected subscriber

FBM KLCI
additions; 2) execution (with respect to rollout of 3G services); and 3) all-
out price war. Digi.Com

♦ Forecasts. Maintained.

♦ Investment case. No change in our DCF-derived fair value of RM25.70

(WACC=7.7%) and Outperform recomemndation on the stock.
Chye Wen Fei
(603) 9280 2172
chye.wen.fei@rhb.com.my

David Chong, CFA

Please read important disclosures at the end of this report. (603) 9280 2186
david.chong@rhb.com.my

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Teleconference highlights

♦ Capital management. Although Digi’s net debt:equity ratio stood at 20:80 as at end-2Q10 (and this ratio was far
from its target capital structure range of between 35:65 and 45:55), management highlighted that the ratio was
affected by timing differences and it would go back up in the subsequent quarters. Based on our calculation, Digi
would need to declare another 48sen/share (net, and in excess of our FY10 net DPS projection of RM1.39/share) in
order to reach the target net debt:equity mix of 45:55 by end-2010.

♦ Outlook. Management continues to target revenue growth of “above industry”, with key revenue drivers being
mobile internet and mobile broadband. In terms of margins, management believes EBITDA margin will remain
stable, as management expects revenue growth, coupled with ongoing cost-saving measures, would help offset the
impact of increased handset subsidies. Note that Digi’s accounting practice is to expense off handset subsidies
immediately to the income statement, as compared to the capitalise and amortise method. Notwithstanding the
above, stronger-than-expected cost savings or lower-than-expected handset subsidies could still result in (full-year)
margins trending positively. For now, we make no changes to our numbers as we had already projected margins to
stay flat in our forecasts.

♦ Impact of new termination rates on Digi. While the new termination rate (which took place effective 15 Jul 10)
is expected to have a slight negative impact on its top line, Digi expects the reduction in revenue to be more than
offset by the reduction in interconnect cost. Recall, the new termination rate, which applies to all voice calls that
originate and terminate on fixed network and mobile network will be reduced to 5sen/minute from existing rates of
8.36 sen/minute (for mobile termination rate) and 6.07 sen/minute (for fixed termination rate) respectively.

Risks

♦ Risks to our view. The risks, in our view, include: 1) weaker-than-expected subscriber additions; 2) execution
(with respect to rollout of 3G services); and 3) all-out price war.

Forecasts

♦ Earnings forecasts. Maintained.

Valuations And Recommendation

♦ Outperform call maintained. No change in our DCF-derived fair value of RM25.70 (WACC=7.7%) and
Outperform recomemndation on the stock.

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Table 2 : Earnings Review

QoQ YoY 1H 1H YoY
FYE Dec (RMm) 2Q09 1Q10 2Q10 (%) (%) FY09 FY10 (%) Comments
Revenue 1,204.8 1,290.4 1,335.1 3.5 10.8 2,423.2 2,625.5 8.3
Improved qoq on higher usage and net
adds.

EBITDA 521.5 575.8 578.4 0.5 10.9 1,064.9 1,154.2 8.4

Margin contracted qoq on the back of
higher handset subsidies.
Dep/Amort (190.9) (190.7) (192.7) 1.1 0.9 (356.0) (383.4) 7.7
EBIT 330.6 385.2 385.7 0.1 16.7 708.9 770.9 8.7
Int exp (9.4) (10.2) (12.9) 27.4 38.2 (19.2) (23.1) 20.3
Total borrowings stood at RM1.0bn as at
2Q10 (3Q09: RM893m; 4Q08: RM418m).
Int inc 2.7 3.5 5.2 48.8 90.7 6.7 8.7 30.1
Pretax 323.9 378.5 378.0 (0.1) 16.7 696.4 756.5 8.6
Tax (89.5) (100.2) (99.6) (0.7) 11.3 (186.5) (199.8) 7.2
MI 0.0 0.0 0.0 nm nm 0.0 0.0 nm
Net profit 234.5 278.3 278.4 0.1 18.7 509.9 556.7 9.2

Margins (%)
43.3 44.6 43.3 43.9 44.0
EBITDA
27.4 29.8 28.9 29.3 29.4
EBIT
26.9 29.3 28.3 28.7 28.8
Pretax
27.6 26.5 26.3 26.8 26.4
ETR
19.5 21.6 20.9 21.0 21.2
Net profit
Source: Company, RHBRI

Table 3 : Key Statistics

FYE Dec 2Q09 1Q10 2Q10 qoq yoy Comments

(%) (%)
Subscribers ('000)
- postpaid 1,176 1,270 1,326 4.4 12.8
- prepaid 6,054 6,677 6,779 1.5 12.0
- broadband 5 77 122 58.4 -
- Total 7,230 7,947 8,105 2.0 12.1

Net adds ('000)

- postpaid 11 35 56 60.0 >100
Thanks to continued reduction on churn.
- prepaid 64 192 102 (46.9) 59.4
Down qoq on higher rotational churn.
- broadband 5 34 45 32.4 -
- Total 75 227 158 (30.4) >100

ARPU (RM)
- postpaid 82 82 83 1.2 1.2
Improved qoq on higher ARPM and MOU.
- prepaid 49 48 47 (2.1) (4.1)
Lower yoy due to pricing pressures.
- Blended 54 53 53 0.0 (1.9)

AMPU
- postpaid 480 496 504 1.6 5.0
- prepaid 158 178 192 7.9 21.5
- Blended 210 227 240 5.7 14.3

Source: Company, RHBRI

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 21 July 2010

Table 4 : Earnings Forecasts Table 5 : Forecast Assumptions

FYE Dec (RMm) FY09a FY10F FY11F FY12F FYE Dec FY10F FY11F FY12F

Turnover 4,909.6 5,271.9 5,627.8 5,947.8 Subscribers ('m)

- Prepaid 6.74 6.94 7.14
EBITDA 2,124.6 2,282.4 2,450.8 2,587.5 - Postpaid 1.31 1.43 1.56
EBITDA margin (%) 43.3 43.3 43.5 43.5 - Broadband 0.13 0.25 0.35
Total 8.17 8.62 9.04
Depn & amortisation (731.1) (766.1) (811.3) (864.7)
ARPU (RM)
EBIT 1,393.4 1,516.4 1,639.6 1,722.9 - Prepaid 48.3 47.8 47.1
EBIT margin (%) 28.4 28.8 29.1 29.0 - Postpaid 84.4 85.7 86.2
- Broadband 100.0 97.5 95.1
Net interest (27.0) (36.0) (27.0) (21.0)
Associates - - - - Capex (RMm) 800.0 850.0 900.0
EI - - - -

Pretax Profit 1,366.5 1,480.4 1,612.6 1,701.9

Tax (366.0) (399.7) (427.3) (451.0)
Minorities 0.0 0.0 0.0 0.0
Net Profit 1,000.5 1,080.7 1,185.2 1,250.9
Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher
risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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subject to the duties of confidentiality, will be made available upon request.

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