This article first appeared in The Edge Financial Daily on November 17, 2017

DiGi.Com Bhd
(Nov 16, RM4.68)
Maintain hold with an unchanged target price of RM4.50: In the upcoming syariah-compliant review by the Securities Commission Malaysia, there is a possibility that DiGi will be excluded from the list. Based on the latest (financial year 2016 [FY16]) audited account, DiGi’s conventional debt surged to RM2.3 billion for spectrum fees payment.

Recall that resulting from 900MHz and 1800MHz spectrum reallocation exercise, DiGi opted for one lump sum payment of the one-time fee component amounting to RM598.5 million to the Malaysian Communications and Multimedia Commission on Nov 1, 2016.

As a result, its conventional debt over asset ratio increased to 41%, surpassing the threshold of 33% by end of FY16. RM5 billion Islamic bond facilities were established in second quarter (2QFY17) to enhance funding flexibility to support the business and growth opportunities. Since then, the financial ratio has been reverted to below the threshold at 30%.

Without any exemption or special treatment, DiGi is likely to be excluded in the upcoming review for failing the ratio mentioned above. While this does not have any impact on the fundamentals of the company, the exclusion may exert some selling pressure on the stock.

Even if this materialises, we are confident that it will make a comeback into the list one year later as its debt position is already syariah-compliant. Sharp share price correction may provide an opportunity for accumulation as DiGi is still the highest dividend-yielding stock in the telco sector, with a decent above 4%.

However it is still our favourite among the large cap telcos due to its under leveraged balance sheet capable of supporting spectrum fee with steady dividend payout. Low frequency band would enhance its efficiency. — Hong Leong Investment Bank Research, Nov 16