Digistar on M&A trail

KUALA LUMPUR: Digistar Corp Bhd is taking the merger and acquisition (M&A) route to spur the company’s next phase of growth in the broadcasting engineering and Internet protocol television (IPTV) markets.

Executive director Lye Siang Long said following years of organic growth, the company was now scouting for foreign M&A targets and active talks were already ongoing with several parties. However, no agreements have been signed so far.

“We are looking abroad... We are still in the talking stage for overseas jobs,” he told The Edge Financial Daily. The company is keen on venturing into neighbouring countries such as Indonesia, Thailand, Vietnam and Cambodia for overseas projects.

Digistar currently derives its revenue solely from the domestic market.

Not many may have noticed that the switch from analogue to digital system for broadcasting system globally is indeed a key catalyst for Digistar’s earnings growth in the future.

The switch is in anticipation of the International Telecommunication Union’s deadline of June 17, 2015 for the conversion to digital platforms to take place in the broadcasting industry.

Although it has yet to conclude any talks for overseas expansion, Digistar is expecting maiden contribution from abroad by the end of FY11 ending Sept 30. This will be helped by its planned expansion to Asia Pacific markets to capitalise on the adoption of digital television (DTV) in the region.

The company is said to have conducted talks with a UK-based company to set up a Singapore-based operating unit to spearhead the regional expansion of Digistar’s broadcasting systems business.

To fund its M&A activity, Lye said Digistar might embark on another round of fund-raising after the recent share placement. But the mode of the fund-raising exercise would depend on the business opportunities crossing the company’s path.
Lye: If business negotiations go through, we might need to raise fund.

“If business negotiations go through, then we might need to raise fund,” said Lye.

Digistar had in January this year announced its intention to undertake a private placement of up to 27.69 million new shares in the company. The placement was finalised the following month when the company placed out 19.14 million shares at 16 sen each, raising RM3.06 million. Digistar said it would use the proceeds to finance its working capital needs.

Digistar, which has an orderbook of about RM100 million, has also tendered for some RM130 million worth of jobs.

The company’s latest set of quarterly results has shown big improvement on earnings. Net profit rose 10 times to RM4.57 million in 2Q ended March 31 this year, compared with RM457,000 a year earlier as revenue grew 91% to RM23.57 million from RM12.31 million. Bottom line had improved as the firm secured jobs with higher profit margins.

The company has a strong balance sheet. It had cash of RM25.58 million versus debts of RM454,000, translating into a net cash of RM25.13 million as at March 31.

Analysts foresee Digistar forming joint ventures with foreign companies to spur the local entity’s regional expansion. In a recent report, SJ Securities said should the plan materialise, Digistar would be a major player in the Asian broadcasting engineering market.

The research house added that Southeast Asia alone could be a multi-billion dollar segment, and that Digistar had the capabilities to expand its reach across Asia where many regional broadcasting entities have yet to switch from analogue to digital system,

For now, only a handful of regional countries have migrated to digital broadcasting. These include Singapore, Hong Kong, South Korea and Japan.

“We predict short supply of expertise and consultants in broadcast engineering throughout Asia. The majority of countries have not converted into digital broadcasting system and the 2015 deadline for the transition is only a few years away.

“If Digistar were to get a slice of the huge pie, the group would see supernormal growth,” SJ Securities said.

In Malaysia, SJ Securities said Digistar by virtue of its expertise and experience in the broadcasting engineering business, is deemed a front-runner to capitalise on the local entities migrating from analogue to digital system.

Of the three broadcast companies here, Astro All Asia Networks plc has migrated to the new platform while government-owned RTM is doing a trial run within the Klang Valley. It is understood that Media Prima Bhd will adopt the digital platform after RTM completes its trial run.

Meanwhile, the IPTV segment is seen as another growth area where Digistar is able to earn recurrent income from the usage of its facilities in places like hospitals and hotels.

“We like Digistar for its huge potential growth prospects and growing recurring income base. Moreover, the industry environment and developments for the media and healthcare industries are very favourable for the group,” SJ Securities said.

The research house’s forecast shows that Digistar’s FY11 net profit would grow fourfold to RM17.3 million from RM4.3 million a year earlier. Revenue is expected to rise 46% to RM107 million from RM73.3 million.

The research house has a target price of 92 sen for Digistar shares based on a price to earnings multiple of seven times FY11 earnings.

In terms of share price performance, Digistar is certainly a star performer among the ACE-listed companies.

The stock has more than tripled with nearly 225% gain since the start of the year. During the last six months, Digistar shares hit a high of 47 sen on May 13, rebounding from a low of 12.5 sen in late December last year.

Digistar shares closed at 45.5 sen yesterday with a market capitalisation of RM96 million.

ACE market-listed Digistar is seeking an upgrade to the main market possibly in the next financial year.

On the company’s dividend policy, Lye said should there be no foreseeble use of the company’s funds for potential viable investments, then the money would be channelled back to shareholders.

Digistar had paid out RM2.66 million to shareholders via a combination of cash and share dividends in FY10, according to its annual report. This constituted 62% of the company’s net profit of RM4.3 million during the year.