Digi ... Jan13

Norwegian Telenor ASA is not opposed to further increasing its stake in DiGi.Com Bhd but will decide on the exact percentage once the Malaysian Government issues more details on the plan to further liberalise the local telecoms sector to allow foreign equity ownership to go up to 70%.

The current (Jan 2013) ceiling for foreign equity ownership is 49% and that is how much Telenor has in DiGi.

Speculation was that the Malaysian Government might make a decision on foreign ownership for the telecoms sector.

During Budget 2013's presentation and at the Economic Transformation Programme (ETP) briefing on Nov 16 2012, the Government would permit up to 70% foreign equity/ownership of the Network Facilities Provider and Network Services Provider class and individual licences. However, no details have come out since as to how the foreign parties can take advantage of buying or increasing stakes in the telecoms sector.

Telenor has been a long-term investor in DiGi.

The local shareholders in DiGi include the Employees Provident Fund (EPF) which holds a 16.09% equity stake, Skim Amanah Saham Malaysia (3.56%), Time dotCom (1.77%) and several local and foreign funds that hold less than 2% equity stake. The remainder is held by retail investors.

Telenor has several ventures in Asia but the DiGi investment is often referred to as the star investment and it has been a star performer for the group when it comes to investments in Asia. Telenor is also active in India, Thailand, Bangladesh and Pakistan.

Globally, it has mobile operations in 11 markets, and more if its stake in Russia's VimpelCom Ltd is counted.

DiGi has been an impressive performer for the Telenor group for many years and investors in the Telenor group see DiGi as a strong company and strong contributor to group performance.

For its third quarter, it reported a revenue of RM715mil and an after tax profit of RM315mil.

The company has 5.6 million subscribers and has pledged to invest about RM700mil in capital expenditure to grow its business.

DiGi was awarded the 4G long-term evolution (LTE) 2.6G spectrum to enable it to offer more applications that can run faster on the 4G platform. It intends to deploy 4G-enabled services within 2013.

Its rating is premised on DiGi's continued growth story and strong capital management initiatives.

As at the third quarter (Q3) of 2012, DiGi's revenue market share expanded to 28%, up from 27.5% from end 2011 (27% as at end 2010).Growth has largely been driven by its above peer average net adds over the past two years (2010-2011) which was also accompanied by a fairly stable, if not, higher average revenue per user (ARPU).

Its growth month-on-month momentum will persist as it consolidates its market share in the youth and Malay ethnic group segments, two key growth areas. DiGi's market share in the Malay ethnic market segment remains below average and has recently only hit double digit market share. On the one hand, while this is extremely low, especially for an established telco player, this also leaves significant scope for growth in the near future. Improving its 3G footprint would be key to driving this growth.

Management targets to accomplish more than 70% population coverage by end of 2013 (it is about 63% currently (Jan 2013)) and thus enabling DiGi to offer their services across new markets, and particularly in new areas of coverage.

The roll out of 3G coverage also enhances DiGi's postpaid proposition, which should further aid ARPU enhancement.

Key investment risk includes irrational competition which could potentially lead to higher handset subsidies and lower tariffs. This could be sparked off by the Dec 2012 round of lower interconnect rates, although the incumbents are likely to remain rationale.

The awarded LTE spectrum would also raise the number of players in the market, although being a niche high end product, impact from the smaller players are likely to be less meaningful.