Earnings-wise, the company continues to surprise on the upside. Revenue was up 10.3% last year to RM5.96 billion. Coupled with efficiency gains, DiGi registered record high operating margins in its latest 4QFY11 results. Earnings were further boosted by the recently approved tax incentives for capital spending on mobile broadband network. As a result, net profit expanded by 6.5% to RM1.25 billion in 2011, despite sharply higher accelerated depreciation charges. The latter is due to the company’s network modernisation programme.
Profit growth on higher revenue and lower effective tax in 2012
The telco industry is domestic-centric. Thus, the business is less affected by the prevailing global uncertainties and is fairly defensive. Of course, should the global economy make a sustained downturn, it will eventually hurt consumer confidence. But at this point, domestic consumption is expected to remain resilient.
DiGi believes it can maintain a high single digit revenue growth this year. With the smallest subscriber base among the big three mobile telcos, DiGi has room to grow by expanding its geographical presence as well as tapping into market segments where it still has low market share. The company’s subscribers grew by more than 13% to 9.92 million at end-2011, up from 8.77 million in the previous year.
| DiGi plans to focus on the tablet market to drive Arpu. |
The average revenue per user (Arpu), meanwhile, appears to have
stabilised with rising mobile Internet usage — including data packages
bundled with smartphones — offsetting the gradual decline in voice
revenue and competitive pricing pressures. Uptake for smartphone packages is expected to keep rising, mirroring our changing lifestyle as well as increasing affordability of handsets. Roughly 20% of DiGi’s customers are smartphone users. In addition to the smartphone market segment, the company also plans to focus on the rapidly growing tablet market segment. Hence, data will continue to drive Arpu.
We forecast net profit will rise by 10% to RM1.33 billion this year, underpinned by the company’s top line growth as well as a low effective tax rate, which is estimated to stay around 22% to 23% for 2012/13. In addition, DiGi’s strengthening cash position will translate into lower financing costs. The company had net cash totalling RM370 million as at end-2011, a reversal from net debt of RM226 million at the end of the previous year.
Based on our forecast, DiGi shares are trading at more than 24 times 2012 earnings, which is higher than the broader market’s average valuations. However, we believe its stock price will be supported by attractive yields.
Attractive yields expected to support stock price
The company is in the process of finalising a capital repayment totalling RM509 million, a small portion of which is imputed in its final dividend of 6.5 sen per share. The stock will trade ex-entitlement on Feb 17. Assuming a 100% profit payout this year, dividends — including the balance of the capital repayment — are estimated to total some 22 sen per share. That will earn shareholders a net yield of 5.4% at the current price of RM4.14.
With a growing cash pile from a strong cash flow stream generated by operations, the management has hinted at another capital management exercise. If it materialises, yields could be even higher.
Cost savings to drive growth over longer term
Looking slightly further ahead, net profit in 2013 will turn sharply higher following the completion of the company’s accelerated depreciation programme — estimated at roughly RM1 billion combined for 2011/12. In addition, DiGi is looking to more operational cost savings once its network modernisation plan is completed by end-2012. It had already begun the physical swapping of a brand new, LTE-ready network for the existing one in 4Q11.
Thus, we forecast the price-earnings ratio will narrow to less than 18 times in 2013 — and will fall further with the incremental savings from its network collaboration with Celcom coming into fruition. The company estimates the annual savings will eventually ramp up to some RM150 million to RM250 million combined after 2015.
In short, we foresee consistent growth in DiGi’s earnings over the next few years that will continue to drive valuations lower, in addition to higher than market average yields over the period.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
