Tuesday, May 3, 2011

DIGI: 1Q11 Results Beat, New Network Positive

3 May 2011
Price Target: RM 29.20
Share Price: RM29.08


Results
1Q11 results above estimates, with a Revenue of RM1,430 million (+10.9% yoy, +0.1% qoq), EBITDA of RM644 million (+12.3% yoy, +2.2% qoq), adj EPS of 42.6 sen (+19.1% yoy, +2.1% qoq).

Deviations
Better than expected EBITDA margins.

Dividend
1Q11 dividend of 43 sen. Digi intends to maintain nominal dividends similar to 2010 and will be paying out in excess of net profit, further hinting of a capital restructuring plan in the works.

Highlights
# As a result of the network modernisation & equipment swap-out with ZTE, Digi will accelerate the depreciation charge on its existing equipment. This will result in additional depreciation charges of RM400-450m, RM500-550m and less than RM100m in 2011, 2012 and 2013 respectively.

# There will be immediate CAPEX savings of 10% with long term CAPEX savings that could result in the CAPEX-tosales ratio falling below 10%. In addition, the new
equipment would reduce O&M costs.

# The new equipment also means that Digi will be ready to roll-out LTE on 2.6GHz by end 2011, pending government permission to occupy the spectrum.

# 2011 EBITDA margins are guided to improve from the previous guidance of maintaining levels similar to 2010. Digi also guided for higher operating cashflows. There was no change to Digi’s guidance of high single digit revenue growth.

Risks
Irrational competition, government & regulatory risks.

Forecasts
Revised target price to RM29.20 (from RM28.80 previously) based on DDM (WACC 6%, TG 0%). FY11 and FY12 EPS were revised by –20.2% and –17.5% respectively primarily due to the accelerated depreciation, which is a non-cash item.

Rating
Hold (TP: RM29.20)

Positives:
– Mobile internet growth, margin improvements from its network sharing agreement with Celcom and its fiberisation agreement with Time DotCom. Further capital management could see additional returns to shareholders.

Valuation
Digi is trading at an FY11 and FY12 PER of 22.2x and 20.3x respectively. Single-tier, net dividend yields of 5.7% and further capital management potential would serve to underpin Digi’s share price.


Source: HLeBroking

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