DiGi.Com Bhd (RM4.06) is piling up cash faster than it can return it to shareholders. The mobile operator has paid dividends exceeding annual net profit in the past five consecutive years. Even so, it is still flush with cash and remains far from its optimal capital structure.
DiGi has previously indicated that it would like to have 35% to 45% net borrowings on its balance sheet, which is equivalent to gearing (debt-to-equity ratio) of roughly 54% to 81%. However, as at end-1Q12, it had gross cash totalling RM1.52 billion and net cash of RM438.2 million. As such, we expect the company will continue to pay out all of its earnings, at least, for the foreseeable future.
Limited by the amount of retained earnings in its balance sheet for the payment of dividends, DiGi proposed a second capital management initiative last month that will seek to return RM495 million to shareholders. This comes hot on the heels of the first capital management exercise to distribute RM509 million announced in September 2011. It is currently in the process of implementing the first capital repayment and expects to disburse the second, which is pending regulatory approvals, at the latest by 1Q13.
Based on our earnings forecast, regular dividends plus the two rounds of capital distribution will total more than 51 sen per share over 2012/13. That will give shareholders a fairly attractive average net yield of more than 6.3% per year at the prevailing share price of RM4.06. The stock will trade ex-entitlement for the first interim net dividend of 5.9 sen per share on May 14.
Positive on growth prospects from several fronts
We are also sanguine on the company’s growth prospects. Despite intense competition, DiGi has been reporting higher than industry average revenue growth over the past two years, while operating margins too have gradually widened. The company expects to achieve mid to high single digit revenue growth this year and at the same time maintain margins.
For 1Q12, service revenue was up 9.6% y-o-y, driven by strong growth in data revenue, and revenue from mobile Internet in particular. Data revenue accounted for 30.7% of service revenue during the quarter. DiGi believes data will continue to be its primary driver for growth for the foreseeable future.
The company intends to pick up the momentum in expanding its 3G coverage this year, from the current 56% to 70% by end-2012. It is also in the process of swapping its entire radio access network for a brand new LTE-ready platform, slated for completion by end-2012. The new network is expected to improve both quality and capacity.
The wider 3G coverage, better quality and increased capacity will support the company’s push to gain market share, especially in signing up new smartphone and tablet users. From its current comparatively smaller presence nationwide, DiGi’s network improvements will allow the company to tap new markets, including users in secondary towns and rural areas.
DiGi also plans to convert existing occasional mobile Internet users — more than half of its subscribers are mobile Internet customers — to take up bundled packages for a range of devices. At the moment, a little over 16% of its subscribers are on the higher revenue generating post-paid plans. The company’s average revenue per user (ARPU) for post-paid subscribers stood at RM85 per month, more than double the RM41 for pre-paid users.
Earnings on an uptrend
DiGi’s network collaboration with Celcom is progressing well, having completed the first phase of site consolidation. The entire exercise is slated for completion by end-2013. As indicated previously, the collaboration is expected to result in incremental cost savings in the future, estimated to total a combined RM2.2 billion over 10 years. The two companies have also commenced joint fibre aggregation and trunk rollout.
DiGi’s 1Q12 earnings results were broadly in line with our expectations. Operating profit was up 12.1% y-o-y on the back of 9.7% growth in turnover, although net profit declined 3.2% to RM320.6 million. This was due primarily to accelerated depreciation charges amounting to about RM145 million during the quarter.
Accelerated depreciation is estimated to total some RM500 million to RM550 million for the full year but will taper off to less than RM100 million in 2013. Once the assets are fully written off, net profit will spike sharply higher.
We estimate net profit totalling RM1.32 billion this year, and rising to RM1.77 billion in 2013. This prices the stock at 24 times our estimated earnings for 2012, which will fall to roughly 17.9 times in 2013 — lower than our estimated valuations for Maxis Bhd and Telekom Malaysia Bhd.
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.
This article appeared in The Edge Financial Daily, May 9, 2012.
