Digi.Com - No near-term active capital mgmt

We attended Digi’s biannual luncheon briefing yesterday where the group’s top management presented updates on the company to analysts. Digi has ruled out any active capital  management moves in the near term as it has to reserve 52% of  its cash balance (or RM750m) to pay MCMC for the accrued liability of the USP. Meanwhile, management is exploring the possibility of setting up a business trust structure although the details are still scarce at this juncture. On the proposed access pricing review, Digi indicated that the earnings impact to it could be muted should the mandated access prices be similar to the current proposed rates. Management also reiterated its FY12 and FY13 earnings guidance despite intensifying competition in the industry. There is no change to our Digi’s FY12-FY14 earnings forecasts.  We are maintaining our Digi’s target price at RM4.95, based on an unchanged targeted FY13 EV/forward EBITDA of 11.8x (+2.0 SD) but are lifting the stock’s rating to a MARKET PERFORM (from an UNDERPERFOM previously) since the share price has dipped by as much as 20.4% since we downgraded it on 24 October.  

No active capital management in the near term.  Digi has RM1.5b (+32.3% since 4Q12) in cash and cash equivalents or RM370m in net cash as of 3Q12. While the handsome cash buffer has led  to some market observers to speculate on a potential capital management exercise on the stock, Digi’s management said it is unlikely to conduct any active capital management moves in the near term as it has to reserve 52% of its cash balance above (or RM750m) to pay MCMC for the accrued liability of the USP fund (for the period of CY09-CY11). While the amount appears high, Digi’s balance sheet remains healthy in our view given that the group is still way below its optimal capital structure of 35%-45% of its net borrowings. On top of that, management also does not rule out the possibility of exploring a business trust structure in the future  although the details on such business trust structure has yet to be unveiled by the authority at this juncture.  

Muted earnings impact on the proposed access pricing. While the proposed access pricing has yet to be finalised by MCMC, Digi is of the view that the potential earnings impact to it could be muted should the mandated access prices be similar to the current proposed rates given the insignificant change in the interconnection rate (for both origination and termination rates) as compared to the current 5 sen/minute. Based on the current proposed rates, Digi believes it is not necessary for it to review its forward business plans, which mainly focus on growing its data revenue.      

Earnings guidance remains unchanged. Digi indicated that its upcoming 4Q12 result could still potentially suffer from the ‘lost revenue opportunities’ due to the effect of its current ongoing network modernisation. Nevertheless, management is still reiterating its earnings guidance for FY12, which is targeted to record a mid to high single digit revenue growth with a 46s% EBITDA margin. For FY13, the group’s ambition is to continue to outgrow its industry peers in terms of revenue growth. Digi believes that the industry’s revenue growth will still be at around 5% and the group can deliver a higher growth of 5%-7% with a sustainable EBITDA margin similar to that of FY12.   

Source: Kenanga