ANALYSTS remain bullish on DiGi.Com Bhd's growth rate for the next financial year ending Dec 31, 2008 (FY08) despite the competitive landscape.
Kenanga Research said in its latest report: “We believe net profit growth will still be double digit in FY08 at 11.7% as market conditions remain conducive with continuous fixed-to-mobile substitution and growing usage.”
In a report by Citi Investment Research analysts Karen Ang and Anand Ramachandran, net profit growth is forecast to be 13.7% in FY08.
This is a higher growth than that given in DiGi's FY08 guidance, which was recently unveiled. DiGi is projecting its net profit growth to be a high single digit and EBITDA (earnings before interest, tax, depreciation and amortisation) margin to be in the mid-40s for FY08.
DiGi foresees the competition shifting a couple of notches higher on the back of more intense price competition induced by mobile number portability (MNP).
This would necessitate higher advertising and promotion spending, resulting in lower EBITDA margin, said OSK Research in an update report.
However, DiGi expects some slippage in the implementation of MNP. “The management expects MNP to be launched sometime in the third quarter rather than second quarter of 2008,” said Citi's report.
DiGi also stated that 3G was not a factor in its competitive positioning in FY08.
“The management believes that the absence of 3G is positive in the short term when it comes to network operating efficiency and marketing,” said the report, adding that no announcements on tie-ups with other 3G operators were forthcoming.
In comparison, Kenanga's report stated: “Management alluded that the lack of 3G has not blunted the company's innovative offerings but did admit the inability to tap into the higher-end market which could demand more sophisticated applications and offerings.”
Although its guidance for FY08 was conservative, DiGi raised its key performance indicator for FY07 for revenue growth from mid-teens to high-teens, EBITDA margin to be 47% to 48% from mid-40s previously, capital expenditure (capex) between RM600mil and RM700mil from RM800mil to RM900mil before, and net profit growth to high-20s from mid-teens.
The optimism was probably due to strong results posted in the FY07 third quarter ended Sept 30.
DiGi recorded a net profit of RM273.3mil on revenue of RM1.11bil for the third quarter compared with net profit of RM180.8mil on revenue of RM920.8mil in the previous corresponding period.
Earnings per share rose to 36.4 sen from 24.1 sen previously.
Citi noted that despite higher competition driving higher churn rates and significantly lower net additions of 92,000 subscribers for the third quarter compared to 241,000 the quarter before, average revenue per user (ARPU) and EBITDA margin were surprisingly resilient at RM59 and 47.3% respectively.
This was compared with ARPU and EBITDA margin recorded in the second quarter at RM58 and 47.4% respectively.
DiGi's strategy to lower postpaid prices (from the 1 Plan postpaid package setting tariffs at a flat RM0.13/min, 13% to 56% below headline tariffs of other postpaid packages) had stimulated more minutes of use, and thus higher ARPUs.
Citi rates DiGi as a “buy/low risk” with a target price of RM28.
“A successful privatisation of Maxis would leave DiGi as one of only two telco options in Malaysia as investors switch at least a part of potential Maxis proceeds to other investments driving a scarcity premium,” said Citi's report.
Citi believes downside risk is limited, thanks to the prospect of higher cash returns to shareholders.
It estimates that DiGi has ample cash to match last year's RM1.35 per share capital reduction on top of its regular dividends.
Kenanga, however, adopts a cautious stance with a “hold” recommendation on a target price of RM23.60 due to intensifying competition, especially with the introduction of MNP.
Telenor had submitted its plans to reduce its stake in DiGi to the Energy, Water and Communications Ministry and would make an announcement soon.
Citi sees any weakness to the stock price on this concern as a buying opportunity.
“We believe an announcement of a sale of 12% to third parties (foreign and local), rather than a potentially earnings dilutive merger with Time dotCom, will be welcomed by the market and mark a positive catalyst for the stock,” it said.
(Source :http://biz.thestar.com.my/news/story.asp?file=/2007/10/29/business/19266169&sec=business)
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