PP 7767/09/2010(025354)

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

Com pany Visit

11 March 2010
MARKET DATELINE

Digi.Com Share Price

Fair Value
:
:
RM22.46
RM23.90
iPhone A Potential Game Changer? Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (DIGI; Code: 6947) Bloomberg: DIGI MK

Net Core EPS Net
FYE Turnover profit EPS EPS# Growth# PER# C.EPS* P/NTA Gearing ROE NDY
Dec (RMm) (RMm) (sen) (sen) (%) (x) (sen) (x) (x) (%) (%)
2009 4,909.6 1,000.5 128.7 128.7 (13.4) 17.5 - 30.6 0.3 58.5 4.6^
2010f 5,271.9 1,080.7 139.0 139.0 8.0 16.2 138.2 24.5 0.4 70.7 5.0
2011f 5,627.8 1,185.2 152.4 152.4 9.7 14.7 145.6 15.9 0.2 71.3 5.4
2012f 5,947.8 1,250.9 160.9 160.9 5.5 14.0 155.1 11.7 0.1 65.0 5.7
# Excludes exceptional items ^Excludes special DPS
Main Market Listing / Non-Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

Issued Capital (m shares) 777.5

♦ We recently met management and set out below the key highlights from Market Cap (RMm) 17,462.7
the visit. Daily Trading Vol (m shs) 0.7
52wk Price Range (RM) 20.19-22.99
♦ iPhone to help drive data traffic … Management was upbeat with the
Major Shareholders: (%)
recent iPhone deal and believe that this, together with the rising adoption
Telenor Asia Pte Ltd 49.0
of smartphones and wireless broadband, could help drive data traffic
EPF 16.6
ahead. There were no further details as to when Digi plans to launch the
phone or pricing details.

♦ … but could also result in escalating handset subsidies. We sensed FYE Dec FY10 FY11 FY12
EPS chg (%) (0.8) (0.3) (0.6)
that Digi would be willing to adopt a more aggressive stand in terms of
Var to Cons (%) 0.6 4.7 3.7
handset subsidies for the iPhone (as well as other smartphones) in order
to push up the take-up rates. We suspect this could be due to potential
PE Band Chart
factors such as its smaller subscriber base and 3G coverage as well as
volume commitments to device manufacturers. Management, however,
would need to weigh the impact of higher subsidies on EBITDA margins. If PER = 19x
Digi decides to become aggressive in handset subsidies, we believe the PER = 16x
PER = 13x
other operators would likely follow suit, potentially leading to a shift in the
industry landscape. For now, we await further pricing details.

♦ Non-voice revenue contribution still low, suggesting strong upside

potential ahead. We remain positive on the growth prospects for the
non-voice revenue segment. We note that Digi’s data revenue currently
accounts for around 20% of mobile revenue, which significantly lags
behind peers Celcom (~30%) and Maxis (32.4%). On the flip side, this Relative Performance To FBM KLCI
low base suggests strong upside potential and growth ahead. We project
FY09-12 voice and non-voice revenue CAGR of 3.4% and 18.2%
FBM KLCI
respectively, which would bring non-voice revenue contribution to around
27% by 2012.

♦ Dividends. Further details on Digi’s capital management would only be

forthcoming in the coming quarters. In the meantime, the payment of Digi.Com
“regular” quarterly dividends, supplemented by special dividends as Digi
continues to right size its balance sheet, should help provide investors a
steady and attractive income stream.

♦ Risks. The risks, in our view, include: 1) weaker-than-expected

subscriber additions; 2) execution (with respect to rollout of 3G services);
and 3) all-out price war.

♦ Forecasts. Apart from some fine-tuning, our earnings forecasts remain

relatively unchanged.
David Chong, CFA
♦ Investment case. We have retained our DCF-derived fair value of (603) 9280 2186
RM23.90 (WACC=8.4%, TG=1.5%) and Outperform call on the stock. david.chong@rhb.com.my

Please read important disclosures at the end of this report. Page 1 of 4

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 11 March 2010

Visit Note

♦ We recently met management and set out below the key highlights from the visit.

♦ iPhone to help drive data traffic but could also result in escalating handset subsidies. Management
appeared upbeat with its recent agreement with Apple to distribute the iPhone and believe that this deal,
together with the rising adoption of smartphones and wireless broadband, could help drive data traffic ahead. In
addition, management sees the timing as opportune given the rising proportion of its postpaid subscribers as
well as expanding 3G network coverage. There were no further details as to when Digi plans to launch the phone
or pricing details.

We sensed that Digi would be willing to adopt a more aggressive stand in terms of handset subsidies for the
iPhone (as well as other smartphones) in order to push up the take-up rates. We suspect this could be due to
potential factors such as its smaller subscriber base and 3G coverage as well as volume commitments to device
manufacturers. Management, however, would need to weigh the impact of higher subsidies on EBITDA margins.
Digi currently expenses off handset subsidies immediately to the income statement. We believe Celcom adopts a
similar treatment while hanset subsidies for Maxis are capitalised and amortised. In the past, the local operators
have not been particularly heavy in terms of handset subsidies. Thus, if Digi decides to become aggressive in
handset subsidies, we believe the other operators would likely follow suit, potentially leading to a shift in the
industry landscape. A potential mitigating factor is that Digi could skew the heavier subsidies towards the
higher-value plans. Judging from the iPhone plans of that for Maxis and peers in Singapore (please see our
report dated 2 Mar 2010), we note that the pricing gap between Maxis and Singaporean peers for the phones
appears wider for the higher-value plans as compared to the basic plans. For now, we await further pricing
details from Digi.

♦ Non-voice revenue contribution still low, suggesting strong upside potential ahead. Last year, around
500,000 of Digi’s customers were actively using 3G services, including small screen users such as the BlackBerry
and other smartphones, as well as big screen users. We remain positive on the growth prospects for the non-
voice revenue segment. Despite only launching 3G services last year, FY09 data revenue grew 6.7% yoy and
was the main driver for total revenue (+2% yoy). Non-sms revenue was up 13.8% yoy, albeit from a smaller
base, while sms revenue increased by 3.7% yoy. We also note that Digi’s data revenue currently accounts for
around 20% of mobile revenue, which significantly lags behind peers Celcom (~30%) and Maxis (32.4%). On
the flip side, its low base suggests strong upside potential and growth ahead. We project FY09-12 voice and
non-voice revenue CAGR of 3.4% and 18.2% respectively, which would bring non-voice revenue contribution to
around 27% by 2012.

♦ Dividends. Further details on Digi’s capital management would only be forthcoming in the coming quarters. In
the meantime, the payment of “regular” quarterly dividends, supplemented by special dividends as Digi
continues to right size its balance sheet, should help provide investors a steady and attractive income stream.
Apart from weaker-than-expected earnings, we highlight three potential constraints Digi may face with respect
to the payment of special dividends. Firstly, the availability of distributable reserves could potentially limit the
amount of dividends that may be paid as a payout ratio that is in excess of annual earnings is typically not
sustainable over a longer term. As at end-2009, Digi’s share premium and retained earnings balances were
RM692m and RM752m respectively. Secondly, capex is usually a major cash outflow item for telco operators,
although we do note management’s target to keep 2010 capex spending flat. Finally, gearing up the balance
sheet would depend on, among others, funding terms and cost. Management’s optimal capital structure may not
be attained if the terms and/or cost are/is unfavourable.

Risks

♦ Risks to our view. The risks, in our view, include: 1) weaker-than-expected subscriber additions; 2) execution
(with respect to rollout of 3G services); and 3) all-out price war.

Forecasts

♦ No major changes. Apart from some fine-tuning, our earnings forecasts remain relatively unchanged.

Page 2 of 4

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 11 March 2010

Valuations And Recommendation

♦ Recommendation and Outperform call unchanged. We have retained our DCF-derived fair value of
RM23.90 (WACC=8.3%, TG=1.5%). Generally, the deal with Apple coupled with ongoing expansion of its 3G
coverage should help Digi better compete and tap into the data revenue market. As mentioned above, Digi
would be starting off from a low base, which suggests strong upside potential for its non-voice revenue.
Meanwhile, Digi’s low gearing level together with ongoing initiative towards a more optimal capital structure
should keep yields attractive. Maintain Outperform call on the stock.

Table 2 : Earnings Forecasts Table 3 : Forecast Assumptions

FYE Dec (RMm) FY09a FY10F FY11F FY12F FYE Dec FY10F FY11F FY12F

Turnover 4,909.6 5,271.9 5,627.8 5,947.8 Subscribers (m)

- Prepaid 6.74 6.94 7.14
EBITDA 2,124.6 2,282.4 2,450.8 2,587.5 - Postpaid 1.31 1.43 1.56
EBITDA margin (%) 43.3 43.3 43.5 43.5 - Broadband 0.13 0.25 0.35
Total 8.17 8.62 9.04
Depn & amortisation (731.1) (766.1) (811.3) (864.7)
ARPU (RM)
EBIT 1,393.4 1,516.4 1,639.6 1,722.9 - Prepaid 48.0 47.5 46.8
EBIT margin (%) 28.4 28.8 29.1 29.0 - Postpaid 85.8 87.1 87.6
- Broadband 100.0 97.5 95.1
Net Interest (27.0) (36.0) (27.0) (21.0)
Associates - - - - Capex (RMm) 800.0 850.0 900.0
EI - - - -

Pretax Profit 1,366.5 1,480.4 1,612.6 1,701.9

Tax (366.0) (399.7) (427.3) (451.0)
Minorities - - - -
Net Profit 1,000.5 1,080.7 1,185.2 1,250.9
Source: Company data, RHBRI estimates

Chart 1: Digi Technical View Point

♦ Digi touched an all-time high of RM23.33 in Nov
2007, but since then, its share price has constantly
traded below the RM22.50 resistance level.

♦ In a steep correction in Oct 2008, the stock

reached a low of RM15.80, near the RM16.00
support level, before staging a sustained uptrend
thereafter.

♦ It closed at RM22.46 on Wednesday, just below the

crucial resistance level at RM22.50.

♦ The momentum readings appear mixed, as the

stock recorded a “hangman-like” candle on the
chart. This indicates potential weakness in the near
term.

♦ Chart wise, the stock is still capped by the

immediate level of RM22.50.

♦ Only if it penetrates RM22.50 convincingly, will it

refresh the bullish momentum and hence heading
for a fresh all-time high in the uncharted territory.

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank
(previously known as RHB Sakura Merchant Bankers). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions
and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be
contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any

Page 3 of 4

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 11 March 2010

manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons
may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or
strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts
any liability for any loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing
investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB
Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity
securities or loans of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other
services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or
more over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take
on higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended
securities, subject to the duties of confidentiality, will be made available upon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for
the actions of third parties in this respect.

Page 4 of 4

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com