Studio Press

Share prices of DiGi.com (RM10.90) continued to confound expectations. Barely two months after failing in its bid to win a block of 3G spectrum, the stock charted new heights. Prices touched an all-time high of RM10.90 this week, lifting its gains for the year-to-date to nearly 40%. Support for the stock appears very strong, still — although some profit-taking is probably inevitable. DiGi recently went on the marketing offensive again, including the launch of aggressively priced plans for corporate customers and capped by the introduction of its new and simpler logo. The company remains focussed on delivering innovation and convenience to its customers, for example offering advance talktime credit to prepaid users.

No 3G for now

However, 3G will not feature in its future plans, at least at this point. DiGi appears adamant that it’ll not be leasing capacity from or taking up equity stakes in either of the two companies that were awarded 3G bandwidths in February. Instead, the company will explore other alternatives to deliver high-speed wireless multimedia services. (There are various existing technologies being touted as viable options and likely many more to come in the rapidly changing communications landscape.) The company has time to re-strategise given that take-up for 3G services is slow and not expected to turn a profit for years to come. (Maxis estimates 3G will account for just about 5% of sales by end-2008.) Without the ‘distraction’, DiGi can focus on improving its existing systems and expanding coverage — to 90% for voice and 60% for broadband (on its EDGE platform, which is sometimes referred to as 2.5G) from the current 82% and 50%, respectively.

Payout galore for shareholders

Relieved of the planned capital expenditure for 3G, DiGi has opted to return excess cash to shareholders. (The company estimates lower capex of between RM750-RM850 million from the original RM800-RM900 million this year.) The company proposed a second capital repayment of 60 sen per share, on top of the initial 75 sen payout. (The entitlement date for the latter has been set for May 9.) If all goes to plan, the second payout should materialise before the end of the year. The company has also crystallised a generous dividend policy, to distribute at least half of its annual net profits. Based on our current earnings estimate, dividends could total over 50 sen per share this year. This means that shareholders could be receiving some RM1.85 apiece in total cash payout within the next 12 months.

Fair valuation on higher yields

The company grew its share of the mobile market to 24.6% in 2005 (from 22.2% in the previous year) while earnings expanded by 48%. We expect this momentum should carry into the current year. Although growth will taper off from last year’s scorching pace, we still expect double-digit earnings expansion. The stock is currently priced at roughly 14.7 times our estimated earnings of 74.2 sen apiece (and around 12.9 times P/E after adjusting for the two capital repayments). We expect the company will remain in a net cash position even after accounting for all the proposed payout. (Net cash stood at RM883 million at end-2005.) Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.