Tuesday, July 27

Analysts neutral on Digi’s growth strategies

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KUCHING: Digi.Com Bhd’s (Digi) diversification of funding sources, capitalisation on new growth opportunities and enhancement of operational efficiencies plans have left analysts with a neutral view on the group.

According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), Digi is set to leverage on the group’s current strong company profile, which could allow the group to secure more cost efficient funding through the growing Islamic financial market.

“The group is aiming to issue sukuk programmes in the coming months but has yet to determine the size as well as the interest rate,” Kenanga Research said.

The research arm noted that Digi also highlighted the group has no intention to distribute dividends via leveraging on its financial and prefer to keep its net debt/earnings before interest, tax, depreciation and amortisation (EBITDA) ratio at below two-fold (versus 0.6-fold as of end-financial year 2016 (FY16)) in the next three years.

Kenanga Research recapped that Digi secured approval to raise RM5 billion through via sukuk programmes last week, which would be used for capital expenditure (capex) and working capital.

“The programmes comprise of a 15-year Islamic medium term note (IMTN) of up to RM5 billion in nominal value and a seven-year Islamic commercial paper (ICP) of up to RM1 billion in nominal value.

“The combined limit is up to RM5 billion in nominal value where RAM has assigned AAA/Stable and P1 ratings for the IMTN/ICP programmes, respectively,” it said.

On new growth opportunities, Kenanga Research noted that despite market condition remaining challenging in 2017, Digi aspires to turn in stronger performance than the industry through improved efficiencies and service revenue and EBITDA margin at around 2016 levels.

The research arm further noted that the key priorities in FY17 will continue focusing on relentlessly growing postpaid and prepaid opportunities while defending core service revenue streams.

“The group intends to continue leveraging on its fiercer network to further strengthening its position in the consumer and enterprise postpaid segments while finding ways to stabilise and increase its profitability in the prepaid division.

“Besides, Digi will continue to grow its digital capabilities and set to become customers’ favourite partner for digital lifestyle,” Kenanga Research said.

All in, the research arm concurred with the management’s view and believed the industry will continue to remain stagnant while waiting for the next growth opportunity to arise.

Kenanga Research highlighted that besides defending core telco revenue streams, Digi also plans to enhance the group’s operational efficiencies via expediting digital transformation as well as efficient use of the strategic spectrum which is 900 megahertz (Mhz) band.

It pointed out that the group is set to introduce more digital services in the coming months that cater to customers’ evolving needs and digital lifestyle as well as drive differentiation through strategic business themes, cross networking, products and services, and channels.

“Besides, management also plans to transform its network to the cloudbased model (which able to accommodate higher data capacities) and leverage on Telenor global scale on sourcing, infrastructure collaborations and talent.

“In short, Digi is aiming to achieve one to three per cent per annum operating cost reduction over the next three years,” the research arm said.

The research arm had imputed some degree of operational efficiencies in its FY17/FY18E financial models.

All in, Kenanga Research made no changes to its FY17/FY18E earnings estimates.

Kenanga Research also maintained its ‘market perform’ rating (in view of Digi’s Syariah compliance status and solid balance sheet) with an unchanged target price of RM4.74 per share, based on targeted FY17E equity value (EV)/forward EBITDA of 13-fold (representing an unchanged -1-fold standard deviation below its two-year mean).