THE yellow banner of Digi.com Bhd may be a prominent sight around town, but Malaysia’s number 3 cellular phone operator may be undergoing a rough patch.
First, the stock fell to its three-year low due to the on going restructuring of the wireless phone industry.
Then, it became the smallest player among the cellular operators after Maxis Communications Bhd and Telekom (M) Bhd completed their acquisition of TIMECell Sdn Bhd and TM Cellular Sdn Bhd respectively.
Currently, DiGi’s share price is down by 52 per cent over the past year, under performing both the market and the telecommunications sector by 48 per cent and 41 per cent respectively. As at Thursday, the stock closed at RM2.35 compared to RM4.82 a year ago.
Although these strikes might have dealt DiGi a blow, telecommunications analysts contacted feel the company still has a chance to gain ground.
“Growth wise, all three players have seen double-digit growth. In terms of average revenue per user, DiGi is taking the number two spot. DiGi will persist, driven by its prepaid segment,” says DBS Vickers investment analyst Andrew Seah.
DiGi managed to hit its target of 1.8 million subscribers by end 2002. Analysts think this is commendable. The sentiment on the stock seems to have taken a beating mainly because market concurs that DiGi will not be able to compete in a new operating environment with two larger competitors.
Since November 2002, DiGi’s subscribers have been about 1.85 million, representing a 59 per cent growth from end 2001. This followed the poor performance of Celcom (M) Bhd and Telekom's TM Cellular early last year.
Celcom had lost market share in the first, second and third quarters, while TM Cellular lost market share in the first and second quarter. This saw DiGi gaining its market share under 16 per cent as at end 2001 to about 18 per cent as at end September 2002.
DiGi's chief operating officer Tore Johnsen had mentioned that DiGi is determined not only to keep its market share but expand it as well.
In fact, only on Wednesday, DiGi's wholly-owned subsidiary, DiGi Telecommunications Sdn Bhd launched its Content Provider Access (CPA) programme for local and foreign content providers.
Johnsen said the company was opening up to content providers its subscriber base of 1.8 million mobile phone users and its infrastructure under the CPA concept to boost the local mobile content industry.
An analyst from a foreign research feels that DiGi's chances of increasing market share would be tough.
“DiGi will do well if it can hold on to its current market share,” he says.
Undeniably though, DiGi will likely see increased competition in the prepaid segment following Celcom's new competitively priced packages introduced last November.
DiGi's net monthly subscriber additions for October and November 2002 of 55,000 were lower than the 76,700 enjoyed in the third quarter.
For its third quarter ended Sept 30, 2002, DiGi registered a net profit of RM78.01 million on the back of RM919.84 million in revenue.
Technically speaking, as Malaysia only has a 35-36 per cent mobile penetration rate, there should be room for growth. With AmResearch Securities and Seah seeing a growth of 17 per cent and 15 per cent, respectively, in the mobile market this year, Digi does stand a chance, although admittedly difficult.
“Of course the operating environment becomes more competitive as the other two competitors become bigger.
“They will both be more focused on marketing and gaining subscribers, and this would be tough on DiGi,” says an analyst from AmResearch.
Although the stock has rebounded from its recent low of RM2.07, fundamentals are not compelling and with the industry consolidation ongoing, many analysts see little reason to re-rate the stock.
According to OSK Research, DiGi broke its crucial support of RM4.00 in July. The RM2.30 level would be another crucial support level. A break below this level would lead the stock down to the RM2.00 mark or even further down to the RM1.30 level.
“Last Tuesday, the daily volume surpassed the 400,000 level, a level that has not been seen for the past 6 months,” says OSK Research technical analyst Shin Kao Jack in his report.
Valuation wise, DiGi is trading at a relatively higher price earnings compared to it competitors. It would not be the cheapest stock to shop around especially since it is almost fairly valued. Depreciation charges have also been eating into its earnings.
Johnsen, however, dismissed talk that DiGi would be marginalized due to its small size. He expects the Malaysian mobile market to expand by 23 per cent this year and DiGi to add another five percentage points to its market share in 2003. DiGi will also be spending RM750 million this year to expand its network.
Commenting on this, OSK Research feels that the capital expenditure plan for 2003 is definitely a lot higher than its estimated RM450 million. Also, based on DiGi's projections, the company would need to add about 1 million subscribers this year to achieve the target of a 25 per cent market share.
Although some argue that DiGi's customer base is of lower-end range, the AmResearch analyst describes DiGi as catering to a different niche.
“It is true that DiGi's subscribers do not have high volume usage, but DiGi believes that if it holds on to these subscribers, over time, margins will grow. This is especially true for teenagers who are yet to have higher disposable income,”
For DiGi's financial year ending in December 2003, Multex Global Estimates has a profit estimate of RM108.10 million with earnings per share of 14.45 sen. For the following financial year in 2004, Multex's forecast increases both profit and earnings per share to RM126.10 million and 16.85 sen respectively.