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DiGi Telecommunications: 4% Annual Dividends Made Easy
By: Peter Ng
Articles (81) Profile

A Simplistically Profitable Plan

Quoting from Berkshire Hathaway’s shareholders letter in 2001 written by Warren Buffett, “I will tell you now that we have embraced the 21st century by entering such cutting-edge industries such as brick, carpet, insulation and paint. Try to control your excitement.” This was said in tandem with the blossoming rich valuations of the technological sector in 2000 before the bubble was finally burst in the following year.

Buffett ended up buying eight companies in that year which he thought were undervalued as people continued to chase after the “next big thing” among the tech companies. These companies that he bought, are engaged in mind-bogglingly simple business activities such as CORT Business Services, provider of rental furniture and Justin Industries, a brick manufacturer and retailer. What followed after 2000 was a housing boom where a large supply of houses was built in the United States, and naturally the demand for products and services related to home building grew synonymously, and so did the legendary investor’s portfolio returns.

Business

Beyond Buffett’s words, they highlighted an important advice to investors: the dullest businesses could just be the best investments. The telecommunications business is perhaps nothing new to most, and is a reminder to investors as one that is a boringly profitable business.

Here, we will explore and look into DiGi Telecommunications, Malaysia’s third largest telecommunications company (telcom) after Maxis and Celcom Axiata based according to their total revenue generated in FY13. According to the company’s FY13 annual report, DiGi’s revenue stream is derived from two segments, voice (66 percent) and data services (34 percent).

Based on the plans opted by their customers be it pre or post-paid, telcoms including Digi would charge their customers for the utilisation of voice and data services. Voice services generally pertain to call time utilised either through a mobile phone device or a fixed-line telephone. On the other hand, data services would largely include the sending of text messages and receiving mobile data (via a 3G or 4G network infrastructure) to access the internet on the go.

Financials

Digi’s revenue has grown by 37.1 percent, accompanied by a 70.5 percent growth in net profit and a 40.6 percent gain in free cash flow between a five-year period from FY09 to FY13. The set of stellar performance does not end here as the company registered a five-year average return on equity of 149.1 percent and a 27.3 percent return on assets.

While some may regard the company’s debt to equity ratio to lean on the high side, as a check on its five-year average total debt to equity ratio is revealed to be 143.8 percent (between FY09 and FY13). However, this was because of a special dividend per share of eight sen which was paid out to shareholders in FY12 from the company’s reserves, leading to a large reduction to the company’s equity base and ultimately an ultra-high debt to equity ratio of 413.3 percent for the year.

The move was due to the swelling reserve and cash position which the company was sitting on. By the end of FY11, the company was holding onto RM1.3 billion under its reserves as well as a RM1.1 billion in its cash hoard. Coupled with its growing free cash flow position, all becomes clear as the company is able to generate a sufficient amount in cash flows per year to comfortably finance its capital expenditure for growth. Ultimately, if a company has no intentions to invest the excess amounts on its balance sheet, it is not too bad of an idea to return them to its shareholders.

In the same five-year period, dividend payouts have been consistent and ranged from RM0.16 to RM0.21 per share. However, Digi’s dividend to free cash flow payout ratio has gone up to 123.8 percent in FY13 which means that the company has paid dividend amounts that are above its cash earnings. This was largely due to working capital changes, resulting in the company to register a lower free cash flow for the year.

Digi and its staff

Digi's free cash flow growth will continue to be driven by growth in wireless data services

Valuations

Between FY09 and FY13, Digi yielded price to earnings (P/E) ratios between 16.2 and 34.1. As at 17 November, the company is registering a P/E ratio of 27.2 and therefore its current valuations is leaning towards the higher side based on its historical range.

On the other hand, a note to point out is that as at 9M14, the company has booked an earnings per share (EPS) of RM0.26 which has already trumped the full year EPS of RM0.22 in FY13.

This could be anticipated since the Malaysian telecommunications industry including Digi is shifting more towards being providers of wireless data services. As a result, this improves gross margins of the telcos and subsequently helps to lift EPS.

Stability Is Key

While this may not be exciting when put against a growth company, however, the resilience and visibility of earnings of the telcos and in this case Digi, and at the right price, offers an attractive package for a defensive investor seeking to protect his or her portfolio from the general economic volatility, while he or she sits calmly by the side line and collects dividends. That is, even during an economic slowdown, demand for mobile phone and fixed-line internet services would still be present as long as the need to stay connected remains.

Tenaga Nasional Price Chart, Source: FactSet
This article is brought to you by Bursa Malaysia Berhad. The research in this article was conducted independently by Pioneers & Leaders (Publishers) Pte Ltd (“Pioneers & Leaders”) and the views and opinions expressed in this article are Pioneers & Leaders’ own and do not represent the views and opinions of Bursa Malaysia. Bursa Malaysia does not warrant or represent, expressly or impliedly as to the accuracy, completeness and currency of the information in this article. In no event shall Bursa Malaysia be liable to the reader or any other third party for any claim howsoever arising out of or in relation to this article.
Backed by a strong interest in investments, Peter's research spans across a range of industries, with his focus placed on companies listed on the SGX.

Please click here for more information about this author.


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