Digi Prospect

Its Prospects … In its 4QFY2012 results, it reported a net profit of rm256 million which represents a drop on a year on year basis anda 22% drop on a quarter on quarter basis. The drop was mainly caused by higher than expected depreciation, which could recur in 2013. At this juncture, the telco is still vulnerable to profit taking.

Its 4QFY2012 dividend of 2.5 sen brought FY2012 dividends per share to 26.3 sen representing a 170% dividend payout. The aggressive payout leaves year end 2012 shareholder reserves at only rm184 million (2.4 sen per share), just sufficient to offer 4Q DPS. Hence DIGI is constrained to 100% dividend payout going forward.

Nevertheless, the normailization of depreciation going forward means net profit could exceed enterprise free cash flow beginning 2014 allowing the company to return excess cash to shareholders and negating the need for a business trust.

DIGI is currently (20 Feb 2013) trading at an unfavourbale historical PER of 29.7 times and a dividend yield of 3.98%.

However view positively the stock could still represent pretty good investment for a more risk averse investor taking the long view. Investors can expect to earn fairly good net yields with the prospect of earnings mometum kicking higher going into 2015.

After distributing nearly rm8.9 billion back to shareholders in the form of dividends and capital repayment in the past six years – equivalent to 130% of total profits during this period – DIGI is set to bring payout levels back in line with earnings. The company has indicated no further capital management initiative in the works, at least for now (Feb 2013).

While there has been much talk about the company adopting a business trust structure that would allow it to pay dividends from fee cash flow as opposed to net profit, the listing framework is still being finalised by regulators. Hence even if DIGI is keen to change its status, this will not happen in the near future.

As such, expect dividends to be capped at its annual profit in 2014.

Market observers are optimistic about its underlying earnings growth, which will pickup momentum going into 2014 and 2015 with catalysts from several fronts.

Expect to see a gradual crystalization of cost savings from both its network modernization exercise and collaboration with Celcom Axiata Bhd. The former is targeted for completion by mid 2013. Cost savings from the sharing of telecommunication sites, access, aggregation and trunk fibre transmission with Celcom – in terms of both capital and operational expenditure – should start to kick in 2014 and increasing in 2015.
Second with the completion of the network modernization, which will be LTE enabled, DIGI will boost its high speed broadband coverage and capacity. This will rejuvenate the company’s push in the mobile broadband market segment, which has been held back since 2011, and in particular, sales for popular tablet devices bundled with data packages. Meanwhile DIGI has expanded its 3G coverage to 67% of the population nationwide and targets to hit 80% by end 2013.

The twin boost in coverage and capacity will allow the company to tap into new market segments and gain market share.

It is believed that the take up rate for 4G will be faster than that for the previous generation on the back of increasing prevalence of smart devices as well as availability of wide ranging content and applications. If is the general consensus that data usage will spur growth going forward, offsetting saturation and gradual decline in voice.