DIGI (6947) - Weak ringgit still a near-term challenge for DiGi

Weak ringgit still a near-term challenge for DiGi
By Affin Hwang Research / The Edge Financial Daily | July 12, 2016 : 10:37 AM MYT

This article first appeared in The Edge Financial Daily, on July 12, 2016.

DiGi.Com Bhd
July 11 (RM4.75)
Maintain hold with an unchanged target price (TP) of RM4.80: We expect DiGi.Com Bhd’s (DiGi) second quarter of financial year 2016 (2QFY16) net profit to meet our and consensus expectations. We estimate 2QFY16 earnings to fall by mid to high single-digit year-on-year (y-o-y) to RM420 million to RM440 million. We also expect DiGi to declare a 2QFY16 dividend per share of 5.4 sen to 5.6 sen, assuming a 100% payout ratio when it announces its 2QFY16 results.

While we estimate DiGi’s 2QFY16 revenue to decline marginally to approximately RM1.7 billion (-1% y-o-y), its earnings should see a sharper decline y-o-y mainly due to a weak ringgit, which would continue to put pressure on international direct dialling (IDD) traffic costs.

The ringgit traded at an average of RM4.01/US dollar in 2QFY16 (2QFY15: RM3.65/US dollar). The weak ringgit, coupled with ongoing intense price competition in data, should lead to a lower earnings before interest, taxes, depreciation and amortisation margin in 2QFY16 (2QFY15: 45.7%).

In mitigation, however, we note that price competition in IDD, while still intense, has eased a little in 2QFY16, following a recent uptick in IDD rates for selected key migrant countries.

The recent relaunch of YTL Communications’ YES 4G LTE plan is expected to further intensify competition, in particular in the postpaid segment, but DiGi has the smallest postpaid exposure (26%) versus its peers (Celcom: 45%; Maxis: 49%). We note that U Mobile has raised competitive intensity a notch by quickly responding with a new postpaid plan that offers a higher data quota of 30GB at RM98, effectively pricing data cheaper at RM3.26/GB, compared with RM4.67/GB previously in its RM70 (15GB) plan.

Key downside risks are a weaker-than-expected ringgit, poorer-than-expected margins and irrational price competition. Key upside risks are a weaker-than-expected US dollar and better-than-expected prepaid revenue.

We make no changes to our earnings forecasts at this juncture and maintain our discounted cash flow-derived (weighted average cost of capital of 6.3% and long-term growth of 2%) 12-month TP of RM4.80. While we see DiGi as a beneficiary of the larger 900MHz spectrum allocation, which would improve its capital expenditure efficiency and network coverage in the medium term, we believe DiGi is still facing headwinds in growing its prepaid revenue, due to the weak ringgit amid IDD price competition, as it has the largest market share in the migrant market. — Affin Hwang Research, July 11

DIGI (6947) - Weak ringgit still a near-term challenge for DiGi