The Edge Billion Ringgit Club 2013 DiGi’s passion for delivering value

by **Cals** Tue 17 Sep 2013, 09:37

The Edge Billion Ringgit Club 2013 DiGi’s passion for delivering value
Business & Markets 2013
Written by Cindy Yeap of theedgemalaysia.com
Tuesday, 17 September 2013 09:17

DIGI.COM BHD [] is one of those stocks every investor wished in hindsight that they had held in their portfolio. After all, DiGi has returned more than 100% of its earnings to shareholders without relying on borrowings since 2007.

Beyond the numbers, DiGi’s corporate social responsibility (CSR) initiatives have won favour with The Edge’s panel of judges, making the company a well-rounded recipient of The Edge Billion Ringgit Club’s Company of the Year award. DiGi also ranked tops among large capitalised stocks for highest return to shareholders over three years.

An investor who paid about RM2.27 apiece for 1,000 DiGi shares at the start of 2008 would today be holding 10,000 DiGi shares worth nearly RM50,000 — 23 times just five years on. In ringgit terms, that RM2,270 would have multiplied easily to RM60,000 if you were to include dividends paid over the past five years, and assuming that the money sat in the bank at 2.9% interest, according to Bloomberg data. The returns are even higher at 42 times (about RM70,000) if the dividends were spent buying more DiGi shares.

In absolute share price terms, the stock ran from its five-year low of RM1.67 on Oct 31, 2008, to RM54.79 apiece (10 x RM5.479) at its five-year high on Oct 19, 2012. Simply put, an investor who paid RM1,700 for 1,000 DiGi shares at its five-year low would have netted RM53,000 or a return of at least 31 times over the four years. To be sure, some market watchers reckon DiGi’s 1-to-10 stock split in November 2011 helped spur the share price higher.

Whatever the case, there’s no denying that the amount of cash DiGi was able to unlock and return to shareholders over the past five years surprised many seasoned investors and analysts who took profit prematurely.
Among the earlier exit points were when the stock went from the RM2 level to the RM4.50 level in mid-2004, and to the RM9 level in mid-2006. But by mid-2007, DiGi’s share price had shot past the RM20 level. It reached the RM30 level before the 1-to-10 stock split.

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Clausen: We certainly continue to have the hunger and ambition to deliver more.

What made DiGi’s phenomenal share price accent special relative to peers is perhaps the many capital management ways its leaders and advisers came up with in recent years to unlock more value for shareholders, just when investors thought there couldn’t possibly be any more surprises. In the last five years, there have been four special cash payments and two rounds of capital returns on top of the regular interim dividends totalling RM1.53 per share.

Now, investors are wondering again whether DiGi’s very good run might have come to an end.

At its RM4.68 close on Sept 2, DiGi’s share price had eased 14.6% over 10 months from its all-time high of RM5.48 apiece. This implies a 4.87% yield at the consensus mean dividend of 22.8 sen apiece for FY2013 and 4.9% yield at the 23.1 sen apiece for FY2014, according to Bloomberg data. At the time of writing, 14 analysts had a “neutral” call on the stock, versus 11 “buy” and 10 “sell” recommendations with target prices ranging between RM3.50 and RM6.25 apiece.

Analysts reckon that embracing the business trust model would allow DiGi to pay dividends from its operating cash flow, which is higher than its accounting profit due to depreciation charges. DiGi could increase the yield by two percentage points over the next three years via a business trust, which could allow greater optimisation of its underleveraged balance sheet, writes Citi Investment Research’s Arthur Pineda in an Aug 21 note.

DiGi is still studying the feasibility of injecting its assets into a business trust, including regulation and tax considerations, and expects to make an announcement on this by year-end.

“Since it has very limited shareholders’ funds to raise its dividend payout to above 100%, a business trust structure is an option. We are hopeful of DiGi announcing this by year-end if that is a viable option. We argue that DiGi’s parent, Telenor, could use more cash distribution now that Telenor is rolling out cellular networks in Myanmar,” UOB Kay Hian Research’s Ong Boon Leong wrote in an Aug 16 note, retaining his “buy” recommendation and RM5.45 target price.
Can DiGi continue to outperform expectations?
“We certainly continue to have the hunger and ambition to deliver more,” says DiGi CEO Henrik Clausen. “DiGi continues to look at opportunities to create value for stakeholders by focusing on our strengths to provide mobile voice and Internet services to customers.

“We believe that data will continue to drive the growth of the company, and that mobile Internet specifically will be a key area in driving Internet penetration to all parts of Malaysia. We are building the right framework and capabilities to ensure that we are well positioned to realise all opportunities within this space.”
CIMB Research’s Kelvin Goh thinks DiGi will “continue punching above its weight” and gain market share largely by growing its data revenue, calling the operator’s rising prepaid data usage “a powerful revenue driver”. Nonetheless, Goh points out in an Aug 15 note that DiGi’s ability to monetise LTE data will be hampered by its lack of spectrum.

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Here, seasoned investors would know that the returns DiGi delivered over the last five years was on top of the dilution its shareholders had to take for the 275 million shares issued to TIME DOTCOM BHD [] for its 3G spectrum in mid-2008. Investors will again be well rewarded if DiGi can repeat its feat.

This article first appeared in The Edge Financial Daily, on September 17, 2013.