Digi.Com - MARKET PERFORM - 12 March 2012

Digi is on track to complete its RM509m capital distribution plan in 1HFY12 but it may declare the amounts in tranches rather than the full amount at one go. Going forward, Digi aims to declare a minimum of 17.5 sen DPS in FY12. The company’s net cash stood at RM370m as of end FY11, way below its optimal capital structure of 0.35x-0.45x net debt to equity ratio. Assuming Digi were to gear up to 0.35x, it could potentially declare another 19.7 sen dividend. There is no change in our Digi FY12-FY14 forecasts for now. We are maintaining our Digi target price at RM4.15 with a MARKET PERFORM rating.  

RM509m (or 6.55sen/share) capital distribution plan is on track to be completed in 1HFY12 but may pay in tranches.  The company has announced that its redeemable preference shares (RPS) have been fully redeemed by DigiTel on 7 March 2012. Upon completion of the redemption, Digi will likely announce its book closure for the payment entitlement within weeks but it may declare the amounts in tranches instead of the full amount at one go.              

Digi targets to declare a minimum of 17.5 sen dividend in FY12.  A similar DPS amount was declared in the previous financial year. We have earlier factored-in a 17.6 sen DPS in our FY12 financial model, which translates to a dividend payout ratio and yield of 105% and 4.3%  respectively. Digi’s net cash stood  at  RM370m  as  of  end  FY11,  which  is  way  below  its optimal capital structure of 0.35x-0.45x net debt to equity ratio. Assuming Digi were to gear up to 0.35x and reward shareholders accordingly, we expect the group could potentially declare another 19.7 sen dividend. 

Maxis latest prepaid plan unlikely to trigger price war. Maxis has launched its all-in-one prepaid plan, Hotlink Bagus, with five service categories namely voice calls, SMS, surfing, international direct dialling  and roaming. The plan, which targets the IDD market, is unlikely to spark a price war in the industry given that the prepaid rates offered by Maxis’ Hotlink Bagus are just to align it with the industry average rate.  

Network modernization will be the biggest challenge in 2012.  Digi has started its network upgrading plan since December 2011 and this will continue throughout 2012. Management views its network upgrading plan as its biggest challenge for 2012 as the upgrade will result in users experiencing service disruptions of up to 4 hours downtime per day over a period of 7 days at areas where the upgrades will be taking place.  The company has 5k base stations in the nation and it targets to upgrade an average of 400 sites per month. Upon completion, all its network sites will be LTE-equipped and ready to deliver fibre-like speeds to support its upcoming LTE services. We understand that the company has already completed its network upgrades in certain areas of Shah Alam, Petaling Jaya, Klang and Kuala Langat in early March.

Source: Kenanga