Studio Press

DiGi.Com Bhd has been given a buy recommendation with target price of RM11.50 by Citigroup Investment Research given that the company is the research house's preferred Malaysian telco stock and a top pick in the regional telecom space.

"We forecast 15% earnings CAGR (compound annual growth rate) in 2005 to 2008E (estimates), as operating leverage boosted profitability and competition remained intense but rational.

"Special dividends could supplement the regular dividend payout, which is amply supported by the balance sheet," Citigroup Research said. DiGi closed at RM9.45 on April 7.

Longer term, it sees upside risk to margins and scale economies should drive these lower.

"Underpinning this is our view the competition will stay rational with Maxis (Communications Bhd and Telekom Malaysia (TM) adopting a live-and-let-live approach to the local market as they execute their regional expansion strategies," it added.

Citigroup Research said at a 2006E price earnings of 12.2 times, DiGi is still in the money on RM1.35 of capital reduction and traded at discounts of 25% of TM and 11% to Maxis, as well as 15% to the market.

"We believe the discounts will narrow, given DiGi's robust growth outlook and a healthy dividend yield offering upside risk," said the research house.

However, it said DiGi's failure to secure a third generation (3G) licence left it at a competitive disadvantage in the longer term.

"DiGi may have to acquire one of the new 3G licencees or consider next-generation alternatives.

"While we recognise this risk, we think it will be 12 to18 months before 3G becomes a key differentiating factor.

Additionally, major shareholder Telenor ASA needs to reduce its stake to 49% after Dec 31, 2006 to meet the foreign ownership limit," it said.

Citigroup Research said there were three choices for Telenor to eliminate a share overhang. It said Telenor could seek another extension, explore options to retain control or place out shares to the market.-theedgedaily