DiGi to power ahead

DIGI.COM Bhd should continue to see earnings growth in 2008 although competition would intensify, given that its competitors were disadvantaged by their cost structure, while lower rates would help stimulate usage, said CIMB Research.
The research house said DiGi was “not too concerned” about the new players in the short term because they had higher operating costs than mobile network operators (MNOs), as they bought wholesale minutes.
Except for TuneTalk given its association with AirAsia Bhd and TuneHotels, these new players did not have a strong band, it added.
It has maintained its outperform rating on DiGi at RM24.20 and discounted cash flow-based (DCF) target price of RM30. Key catalysts for re-rating were continued capital management and strong earnings and market share growth.
“We think the upstarts will have a lower ARPU (average revenue per user) than the incumbents given that higher-end subscribers are unlikely to switch to a start-up telco where the service quality and customer experience is unproven,” it said in a research note following a meeting with DiGi’s management last week.
CIMB Research said it expected U Mobile, TuneTalk and REDtone to launch their services in the coming months.
“U Mobile is a quasi-MNO and –mobile virtual network operator (MNVO). We believe it has rolled out its 3G network to some urban centres. Its customers will roam on Celcom’s 2G network in areas where it does not have coverage.
“TuneTalk and REDtone are pure MNVOs that buy wholesale minutes from Celcom. REDtone is expected to launch its service in 1Q08 (first quarter of 2008) while TuneTalk is reportedly applying for licences,” it added.
CIMB Research said lower tariffs were not necessarily a bad thing, as Malaysia’s tariffs were still above the regional average and usage was below the regional average.
“While DiGi believes that there may be pressure on prepaid tariffs with mobile number portability (MNP) and the entry of more players, there is still room for usage to increase.
“We note that DiGi prepaid ARPU rose from RM53 in FY05 to RM55 in 9MFY07 (first nine months of financial year 2007) and prepaid minutes of use (MOU) increased from 151 to 163 per month over this period,” it said.
The research house added that DiGi believed that postpaid tariffs were already fairly low and the company saw limited scope for them to move downwards.
“We believe the MNVOs buy wholesale minutes at a higher price than retail postpaid rates. Hence, we do not expect ARPUs to be significantly affected by competition.
“Instead, we think DiGi is likely to be a beneficiary of MNP as its strong brand, innovative marketing and 3G will appeal to postpaid subscribers. These will help it poach postpaid subscribers from Celcom and Maxis,” it said.
DiGi’s sub-brand, Happy, would be a positive contributor to the company and would take market share from its rivals, as Happy aimed at a niche market which made very short calls and long duration calls.
“The company thinks that margins from this brand may even be higher than its current margins given its very low-cost model,” it said.
The research house said DiGi remained its top pick in the telecommunications sector in Malaysia for the latter’s higher earnings growth, dividend potential and more attractive valuations.
It has projected DiGi to post net profits of RM1.06 billion in FY07, RM1.29 billion in FY08 and RM1.45 billion in FY09.
DiGi rose 40 sen to close at RM24.60 last Friday with 562,500 shares changing hands.