Strong subscriber growth propelling turnover. DiGi (RM2.27) turned in solid revenue growth of 15% in October - December 2002 from the preceding quarter, as its subscriber base surged from about 1.63 million at end-September to an estimated 1.85 million at end-December.
This was the strongest pace of sequential revenue growth in 2002, having strengthened from 8% in April-June and 4% in July-September 2002.
Against annualised 2001 revenue (from eight months’ results due to change of year end), full-year revenue would have grown by 15% as the strong subscriber expansion (almost 60%) more than offset the decline in average revenue per user due to the higher proportion of lower usage subscribers.
DiGi’s market share rose from less than 16% in 2001 to more than 18% at end-2002.
Improving margins. As costs were kept under control, operating margins jumped from 34% in July-September to 42.4% in October - December 2002, and pre-tax would have improved even more if not for the increase in depreciation charges from RM85mil to RM110mil.
The latter reflected the new policy (effective July 2002) to depreciate telecommunication network assets over 10 years (rather than 15-20 years previously), as well as the increase in fixed assets (RM2.2bil at end-September to RM2.5bil at end-2002) to support the expanded user network.
The revised depreciation policy has reduced pre-tax by RM41mil-RM42mil per quarter in the third and fourth quarters of 2002.
Again, we would stress that depreciation treatment has NO cash flows implications.
Manageable balance sheet. Given the dominance of prepaid-users, cash generation is strong and credit risks minimal.
Despite the 26% increase in fixed assets in 2002, DiGi’s net debt only rose 9% to RM666mil at end-December (about 50% of shareholders funds, no change from end-2001).
Meanwhile, our concerns over potential asset provisions, on top of the revised depreciation policy, did not materialise.
Overall, the latest results were slightly below our expectations due to higher depreciation charges.
Nonetheless, we believe the focus should be on the strong operational growth, which is particularly impressive in the competitive environment.
Seeing value. In any case, any result shortfall would have been more than discounted in the depressed share price, which is at the lowest level since 1999, and less than half the General Offer price of RM6.60 per share paid by Telenor back in 2001.
Besides the overall sluggish market, we believe a particular drag for DiGi would be the negative perception after it opted out of the 3G race.
On our part, we see a place for a niche player, especially one which has demonstrated its ability to gain market share.
Indeed, the still evolving 3G technology is also not without its risks.
In this respect, we are not negative on DiGi’s strategic positioning as a Mobile Virtual Network Operator, and would look forward to the future delivery of more value-added solutions to its rising customer base.
Trading BUY due to thin liquidity. At the current share price, DiGi would be ranked the second lowest among domestic telecommunication peers in terms of PER [after Maxis (RM5.45)], and the lowest in terms of EV/EBITDA (debt-adjusted market capitalisation to operating profit) and EV per subscriber.
As mentioned recently, our concern is its thin trading liquidity and the fact that the company is in breach of the 25% public shareholding requirement (extended compliance deadline up to Jun 2003).
On the whole, we still see trading opportunities in DiGi within the recent share price range of between RM2.20 and RM2.50.
Maintain trading buy.
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