BIG CAP COMPANIES — RM10 BILLION TO RM40 BILLION MARKET CAPITALISATION / HIGHEST RETURN ON EQUITY OVER THREE YEARS: TELECOMMUNICATIONS & MEDIA: Digi.com Bhd - Shareholders rewarded despite challenges

This article first appeared in The Edge Malaysia Weekly, on December 17, 2018 - December 23, 2018.
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Digi.com Bhd has done an admirable job of generating strong returns for its shareholders, considering the competitive pressures it faces. The telecommunications company (telco) yet again emerged a clear leader on the return on equity (ROE) front.

Its ROE came in at 285% in FY2017, 315% in FY2016 and 332% in FY2015. Despite the sequentially lower figure over the three years,

Digi’s ROE was well ahead of that of its peers. Its remarkably higher ROE is largely because of its high dividend payout and capital returns that keep its shareholders’ equity low. Last year, it paid shareholders a dividend of 18.8 sen a share, equivalent to RM1.46 billion or 99% of its net earnings.

But it faces growing headwinds in the industry and it may be tough for it to break the downward trend of its ROE. The group has, nonetheless, made it a top priority to achieve growth and profitability in the challenging environment.

“Our strategy for this is clear: deliver great internet services to activate opportunities from our core, build scale for our new digital platforms and stay unwavering in our commitment to operational and financial discipline,” CEO Albern Murty says in its 2017 annual report.

In its third quarter ended September this year, Digi reported a net profit of RM392.54 million, which was a 2.1% year-on-year and quarter-on-quarter increase. Revenue grew 1.9% to RM1.6 billion. The improved performance came on the back of strong postpaid service revenue and good cost discipline.

For the cumulative nine months, net profit grew 4.2% to RM1.16 billion, which was within analysts’ expectations. Dividends amounted to 14.8 sen a share compared with 14.2 sen a share in the same period a year ago.

“The improvement in earnings translates into a better dividend payment as the company paid out almost all of its earnings as dividend. At this juncture, Digi has the most attractive dividend yield of more than 4.5% among its peers,” MIDF Research says in a post-results report on Oct 18.

The group’s postpaid customer base in the third quarter grew 2.8% from the previous corresponding period to 2.73 million. Note that average revenue per user (ARPU) remained strong at RM76 a month despite continuous prepaid to postpaid entry-level plan conversion.

Meanwhile, its prepaid customer base grew a marginal 0.8% to 9.07 million with ARPU slightly lower at RM31 a month compared with RM32 in the second quarter.

On the whole, Digi’s subscriber base grew 1.23% to 11.8 million.

“Moving forward, the group is aiming to pursue sustainable growth opportunities ahead with efficient operations and digital transformation,” says Kenanga Research.

As part of its growing digital initiatives, Digi, which launched its e-wallet vcash late last year, forged a partnership with AmBank Bhd in August that will enable the bank’s merchant network to accept the telco’s vcash QR code on top of the usual card and cash services.

It has also launched Omni, an enterprise-level virtual phone system for SMEs.

Moving forward, there is interest in the market as to whether Digi plans to enter the fixed broadband space. Rival Axiata Group Bhd recently said it would invest heavily in this space next year while Maxis Bhd entered it some years ago.

At the time of writing, Bloomberg data showed seven analysts had a “buy” call on Digi while 13 had a “hold” and seven, a “sell’. Their target prices ranged from RM3.30 to RM5.50 with the 12-month consensus target price at RM4.66.

UOB Kay Hian Research, which has “buy” call, projects a net dividend of 19.5 sen a share for the full year. “The stock offers a sustainable and attractive dividend yield of close to 5%. We see a compelling risk-reward profile for this well-managed company,” it says in an Oct 18 report after the release of the third-quarter results.