Rising concern over the health of the global economy and uncertainty on the market outlook over the next few months are drawing more investors to defensive, high dividend paying stocks.
Under the prevailing trading conditions, telecommunication stocks have clearly been among the beneficiaries. Telekom Malaysia Bhd (TM), Maxis Bhd, DiGi.Com Bhd and Axiata Group Bhd have all outperformed the FBM KLCI in the year to date.
Save for Axiata, the other telcos are domestic-centric. Revenue is therefore expected to remain fairly resilient on the back of the forecast growth in domestic consumption. While competition is intense, we do not foresee a sustained price war among the key players. Case in point is DiGi.
Its latest earnings report indicates it will continue to focus on fine-tuning its packages for target market segments as opposed to wholesale price cutting. With relatively stable and strong cash flow from operations, all the telcos are expected to maintain generous dividend payouts.
In addition, TM’s shares have gone ex for a 30 sen per share capital repayment while DiGi is in the process of gaining regulatory approvals for its second capital management initiative in as many years.
Their perceived defensiveness and higher than market average yields will probably continue to appeal to the more risk-averse investors in the near to medium term, even though valuations have been on an uptrend. Second interim dividend of 5.9 sen per share DiGi is sticking to its track record of quarterly dividend payments, which gives shareholders a steady and dependable income stream.
The stock will trade ex-entitlement for a second interim dividend of 5.9 sen per share on Aug 22. The dividend payout will amount to RM459 million or about 141.5% of net profit for the second quarter of the financial year ending Dec 31, 2012 (2QFY12), a portion of which is distributed from the company’s first capital management initiative totalling RM509 million announced last year. A second capital management proposal totalling RM495 million is currently in the process of securing regulatory approvals. We expect both sums to be fully disbursed over 2012/13, in addition to the annual dividends.
Expect 100% profit payout ratio With the company piling up cash faster than it can return to shareholders, it is likely that DiGi will continue to pay out all of its annual earnings for the foreseeable future. Indeed, we forecast it will remain in a net cash position even after paying 100% of net profit as dividends in 2012/13 plus the two capital management exercises. The company had net cash totalling more than RM435 million as at end-June this year.
Based on our earnings forecast and the capital management amounts, total disbursements are estimated at roughly 51 sen per share for the two years. That will earn shareholders a fairly attractive average annual net yield of more than 5.7% at the current share price of RM4.44.
Strong earnings growth expected in 2013 Net profit growth for the current year is estimated at a rather unexciting 3% to RM1.29 billion, weighed down in part by the company’s move to accelerate depreciation for its radio access network, which is being swapped out for one that is LTE-ready. More than one-third of the total sites have been replaced to date. It is on track to complete the upgrade within the Klang Valley by end-August and the entire network by end-2012.
Accelerated depreciation is estimated at some RM500 million to RM550 million in 2012, with the balance of just about RM100 million to be expensed next year. As such, we expect to see a sharp jump in net profit in 2013 to an estimated RM1.76 billion. This will help drive valuations lower — to a relatively decent 19.6 times earnings.
To recap, DiGi’s latest earnings results for 2QFY12 were broadly in line with expectations. Turnover was up 7.6% year-on-year (y-o-y) to RM1.58 billion, which brings turnover for the first half of the year to RM3.15 billion or 8.7% higher than the previous corresponding period. Net profit for 2Q came up to RM324.2 million, bringing earnings for the first half to RM644.8 million, up 13.6% y-o-y.
This was achieved amid intense competition, especially in the pre-paid IDD segment from U-Mobile and Maxis. Maxis has been on an aggressive drive to regain market share in recent months. Sanguine on longer-term prospects Completion of the network modernisation will give the company a stronger hand in expanding its market share. Its 3G coverage is targeted to increase to 70%, from the current 58%, with significant improvement expected in both quality and capacity. This bodes well for earnings growth going forward.
DiGi intends to focus on higher value customers in the rapidly expanding smartphone and tablet market segments, where its share of the market is still the lowest among the three big mobile players. There are segments of markets where the company has limited presence, which translates into growth opportunities.
The company plans to renew its subscriber acquisition drive in the mobile broadband (dongle) segment once the additional capacity is online. It had pared back efforts in this market segment over the past few quarters amid capacity limitations and the network modernisation.
In addition to top line growth, DiGi should start to see cost savings from its network collaboration with Celcom by next year. The process of consolidating telecommunication sites is on track for completion by end-2013.
The companies have also commenced the rollout of the joint fibreoptic transmission network.
DiGi had earlier indicated combined annual savings totalling RM150 million to RM250 million beyond 2015. Both companies are in discussion on possible further collaboration, including on the next generation network. As such, we remain relatively upbeat on DiGi’s longer term growth prospects.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser.
This article appeared in The Edge Financial Daily on August 3, 2012.
