DiGi data for the future

DiGi.Com Bhd
(Dec 20, RM24.70)
Maintain buy at RM24.60 with target price of RM27: It was reported yesterday that DiGi is planning to spend RM700 million on capex in FY2011. This is similar to the estimated capex spent in FY2010.

However, for FY2011, the capex will be more skewed towards enhancing data and internet services.

We are not surprised with the RM700 million capex for FY2011 as it is in line with our estimates. Also, we had expected that FY2011 capex spending would be more towards rolling out its 3G/HSPA network as we expect data to be its key driver for growth in FY2011.

To recap, Digi’s 3Q2010 revenue grew strongly (+9.1% year-on-year) due to the strong increase in data revenue, which grew by 25.3% y-o-y to RM241 million. For 9MFY2010, data revenue grew by 16.2% y-o-y to RM838 million, contributing 21.1% to total revenue.

In comparison, 9MFY2009 data revenue contributed 19.7% to total revenue. The strong growth in data revenue was driven by the increasing popularity of smart phones. Management estimates that 50% of new subscriptions was for smartphones.

We are not surprised that DiGi is aiming to grow its data and mobile internet given that the market for voice is already saturated in Malaysia, with a mobile penetration rate of more than 106%. We expect that data will be a key driver for growth, increasing its contribution to 24% of FY2011 total revenue.

We also believe that the market for mobile internet is big enough since the individual broadband penetration rate is 11.4% as at October, (the current household broadband penetration rate is more than 55%). We expect an increasing trend of households, especially urban households, owning more than one mobile internet device.

We maintain our “buy” recommendation for DiGi as we believe data revenue has the potential to grow further.
We believe its consistently above-market dividend yield will enhance the attractiveness of the stock. We expect its dividend yield to reach 6.1%, based on the current price in FY2010. Our target price of RM27 is based on the discounted dividend model.

With an estimated long-term dividend payout ratio of 80%, beta of 0.38 (Source: Bloomberg), Bursa Malaysia market return rate of 8.74% (Source: Bloomberg) and MGS risk-free rate of 3.82% (Source: Bloomberg) — MIDF Research, Dec 20