DIGI ... Sep12

Though earnings prospects look appealing for financial year 2013 onwards, current (Sept 2012) valuations have fully factored in the positive earnings growth. Downside risks would however be offset by the attractive dividend yield of 5.6%. (1.3% capital distribution and 4.3% pure dividend yield).

Expect incremental dividend yields over the longer term due to improved earnings along (and corresponding cashflows) with stagnant capital expenditure given the saturated growth in Malaysian telco industry. Apart from that, its net cash postion would also allow the group to declare further special dividends.

Though DiGi's stated long-term dividend policy has been to “pay out a minimum 80% of net income”, its actual ordinary payout has been in excess of 100%. The company has also either carried out a capital repayment or offered a special dividend in the past.

The company is in the process of finalising a capital repayment totaling RM495mil or 6.4 per share and is expected to be completed by first half of FY13. This comes just after its first capital management exercise, totaling RM509mil, which was distributed in the first half 2012.

Given that the company is still in a net cash position after two rounds of capital repayment, do not rule out the likelihood of special dividend or further capital repayments in the near term.

The group is embarking on network collaboration with Celcom, which includes sharing of sites and backhauls transmission to ensure both parties are able to carry higher traffic volumes. The entire exercise is slated for completion by end-2013. As indicated previously, the collaboration is expected to result in incremental cost savings in the future, totaling RM2.2bil over 10 years, starting from 2015 with an average of RM150mil to RM250mil per year. In addition, both parties have also commenced joint fibre aggregation and trunk rollout.

Besides that, a network modernisation initiative that involves replacing its entire radio access network for a brand new long-term evolution (LTE)-ready platform is on target and is slated for completion by end-2012. The new network is expected to deliver highspeed broadband and next generation services with the introduction of a portfolio of bandwidths. The LTE-ready network will ensure faster roll-out of broadband services through wider coverage and enable to deliver substantially faster speed at affordable prices.

DiGi became the fourth operator to enter the Malaysia 's 3G arena with the launch of 3G broadband in the fourth quarter of 2008. The delayed entry places it behind the competition as its population coverage is still low, standing at 60% compared with Celcom 81.7% and Maxis 81%. The company intends to pick up momentum in expanding its 3G population coverage this year to 70% and over 80% by 2015.

Downside risks arising mainly from price competition amongst its peers. This could revole primarily in the mobile-internet and wireless broadband segments due to the arrival of several new players namely, U-mobile and YTL Communications as well as Wimax players like Green Packet's P1.