Having outperformed listed telco peers and the headline bellwether index for the broader market, we suspect shares for DiGi.Com Bhd (RM5.15) could stay range-bound for awhile yet.
Nevertheless, we remain fairly sanguine on the longer-term growth prospects for the company. The sector will also continue to benefit from investors’ risk-averse sentiment as long as the outlook for the global economic health remains clouded.
After hitting an all-time high of RM5.57, DiGi’s share price has retraced in recent days, due in part to its third quarter of the financial year ending Dec 31 (3Q12) earnings results that were slightly below market expectations. Net profit came in at RM315.4 million — compared with RM320.6 million in 1Q12 and RM324.2 million in 2Q12 — on the back of lower year-on-year (y-o-y) turnover growth.
This was attributed primarily to hiccups encountered during the company’s network modernisation, which resulted in lost revenue opportunities — to the tune of about RM40 million to RM50 million. Positively, its management believes that mitigation measures undertaken have seen improved usage since end-3Q12 and expects the resumption in growth momentum in the current quarter. Thus, 4Q12 earnings should register quarter-on-quarter improvements.
Completion for the network modernisation is slightly delayed with a more cautious swap schedule and is now targeted by mid-2013. At end-3Q12, about 50% of the sites were successfully swapped, including that for the entire Klang Valley.
Expects higher than industry average revenue growth in 2013
The company expects to pick up the momentum for 3G rollout thereafter, which would help drive customer acquisition next year on the back of wider coverage, higher capacity and better quality, especially for data users.
In particular, DiGi intends to focus on higher value customers in the rapidly expanding smartphone and tablet market segments, where its market share is still the lowest among the three big mobile operators. There are market segments where DiGi has limited presence, which translates into growth opportunities. At the same time, it has been working at re-contracting existing post-paid subscribers.
Whilst the pre-paid market segment remains highly competitive, especially within the IDD segment, average revenue per user has held up well, stabilising over the past three quarters. This could be due in part to increasing usage and revenue from mobile Internet on the back of flexible pay-as-you-use plans.
In all, the management is upbeat that it can achieve slightly higher than industry average revenue growth in 2013 while maintaining operating margins at current levels.
Certainly, we expect DiGi to report significantly higher earnings in 2013, with the last of the accelerated depreciation to be expensed. To recap, the company estimates some RM500 million to RM550 million in total accelerated depreciation — for the old radio access network being swapped out for one that is LTE-ready — this year.
This leaves just about RM100 million to be written off in 2013. Net profit is forecast to jump to RM1.75 billion, up from an estimated RM1.28 billion this year.
We also expect cost savings from its collaboration with Celcom to start kicking in — and further boost underlying earnings growth going forward.
The process of consolidating both companies’ telecommunication sites is on track for completion by end-2013. DiGi and Celcom have also commenced the rollout of the joint fibre transmission network. The company had earlier indicated gradual savings from 2013 onwards, eventually totalling up to RM125 million per annum by 2015.
Net yields estimated at 4.4% to 4.8% for 2013-2014
Thus, while the stock’s valuations have risen, we believe positive growth prospects as well as expectations for steady dividends will keep its price comparatively resilient.
Based on our forecast, the stock is trading at roughly 22.9 times estimated 2013 earnings. Its price-earnings multiples will drop to some 20.7 times by 2014.
Given the company’s strong balance sheet — net cash totalling RM370 million at end-September — we expect DiGi will pay out all of its profits going forward. This would translate into dividends totalling some 22.5 sen and 24.9 sen per share in 2013 and 2014, respectively — and earning shareholders still decent net yields of 4.4% to 4.8% at the current share price.
As a reminder, DiGi shares will trade ex-entitlement for 12 sen per share interim dividends tomorrow. This payment includes the entire balance from the two capital management exercises announced in 2011 and earlier this year.
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.
Written by Insider Asia
This article first appeared in The Edge Financial Daily, on Nov 7, 2012.
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