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Telecommunication companies are usually favoured by investors for their resilient business models and attractive dividend yields. However, over the past few years, industry prospects have become less appealing due to a maturing domestic market in Malaysia, slower growth, and downward pressure on earnings from heightened competition and increasing costs. In order to stay competitive and meet the changing trends in consumer demands (especially the demand for internet data), telcos are left with no other choice but to upgrade their infrastructure while improving their product offerings and service quality. Consequently, capex has risen significantly and affected profitability.
For many years, Digi.com Berhad (Bursa: 6947) has been an investor favourite due to its steady yield and capital appreciation. However, the company’s high dividend payout ratio – Digi paid 99%, 110%, and 100% from 2014 to 2016 – has recently come into question with regards to the evolving industry landscape. Competitors Maxis and Axiata have already announced they would lower their payout ratios to 50-75% to conserve capital to fund future business growth and expansion.
For the longest time, I’ve been labelled a hardcore Digi user by my family as I’ve been a customer since Digi first launched. However, I surprised my family when I switched to another telco recently due to several less than satisfactory experiences I encountered during my visits to Digi stores. Nevertheless, I decided to attend Digi’s AGM to get more insights about the company and the Malaysian telco industry.
1. Digi has the widest LTE-Advanced network in Malaysia with its population coverage growing from 29% to 41%, serving 61 towns nationwide. Likewise, Digi’s 4G LTE population coverage has grown significantly from 65% to 85% and serves 275 towns. In 2016, LTE subscribers jumped 81% to 4.2 million and active internet subscribers hit 8.1 million due to an additional 586,000 new internet subscribers. Digi has now emerged as Malaysia’s largest mobile operator with 12.3 million subscribers in 2016 (from 12.1 million subscribers in 2015).
2. Digi gained 259,000 new postpaid subscribers in 2016 bringing total postpaid subscribers to 2.1 million. Postpaid revenue recorded its highest growth in five years growing 10.2% to RM1.96 billion. However, average revenue per user (ARPU) remained at RM81.
3. Prepaid revenue declined 6.6% year-on-year to RM4.27 billion in 2016. Prepaid ARPU also fell 10% to RM35. The management mentioned the prepaid market continues to be challenging due to competition, weaker consumer sentiment, and declining demand in traditional voice and messaging services which forms a large proportion of prepaid revenues.
4. Overall ARPU has falling from RM48 in 2013 to RM42 in 2016. With the growing demand for internet and digital services, ARPU from traditional voice and messaging services will continue to decline and replaced by more sustainable internet revenue streams albeit at a lower ARPU. The management revealed it has no specific target for ARPU f or 2017 and will continue to focus on growing its core business and digital opportunities.
5. Service revenue remained resilient and recorded a slight decline of 1.9% year-on-year to RM6.23 billion. Of this, internet revenue grew 11.4% to RM2.31 billion and now comprises 37.2% of service revenue. The solid growth in internet revenue was anchored by increase in smartphone and active internet users; they currently comprise 64.7% and 65.8% of Digi’s total subscriber base respectively.
6. Revenue from sales of devices declined 46% year-on-year to RM271 million. Sales of devices in bundled plans are usually driven by seasonal demand and customer demand skewed towards sim-only mobile plans and more affordable 4G phone bundles in 2016. However, Digi will continue to leverage on seasonal demand of popular 4G devices in its bundled plans but it will not focus on driving sales of devices as they are usually bundled to customers at a discount.
7. Despite seeing strong growth in its 4G+ network and postpaid users, Digi’s total revenue declined from RM6.9 billion in 2015 to RM6.6 billion in 2016. Moving forward, management plans to tap on the strong demand for sim-only mobile plans, scale down on device sales, stabilise its prepaid numbers. The management expects stronger internet and postpaid growth in 2017 on the back when Digi rolls out its 4G LTE 900MHz spectrum in 2017.
8. Digi plans to deploy its 4G LTE 900 MHz spectrum in July 2017. The Malaysian Communications and Multimedia Commission assigned 2 x 5MHz of 900MHz and 2 x 20MHz of 1800MHz spectrum bands to Digi for a tenure of 15 years, for an upfront fee of RM598.5 million with annual fee of RM51.5 million. The management commented that the spectrum allocation and pricing is fair. The new 900MHz spectrum band will bridge the gap between Digi and its industry players and enables Digi to optimize its network and enhance quality coverage for its customers.
The management has initiated spectrum re-arming based on the new 900MHz and 1800MHz spectrum allocation at end 2016 and successfully completed the exercise in 1Q 2017. The 900MHz site deployment in 2017 will primarily focus on delivering stronger indoor coverage to key market centres and pushing wider 4G LTE network coverage nationwide. Going forward, Digi will continue to roll out 900MHz sites progressively to more locations to support customers with better network quality and coverage to complement its existing 4G+ network.
9. EBITDA remained relatively stable at RM2.96 billion and EBITDA margin improved 200 basis points to 45%. In order to support its 4G+ network expansions, the management looked to improve operational efficiency to lower costs. So far, Digi has been on track. Cost of goods sold improved 19.3% to RM1.64 billion from lower device and traffic costs. Gross profit grew 1.6% to RM4.96 billion and OPEX only increased 3.3% (compared to 6.6% the previous year) despite Digi’s robust network and infrastructure expansion.
10. Operating cash flow grew 4.6% year-on-year to RM2.18 billion. Digi also invested RM780 million in Capex in 2016 to improve the quality and coverage of its 4G+ network and accelerate fiber network expansion. Normalised profit after tax fell 3.1% to RM1.67 billion mainly due to progressively higher depreciation costs from its annual Capex investments.
11. Earnings per share trimmed lower to 21 sen after accounting for the previous year’s RM35 million tax provision. Nevertheless, Digi shareholders have been rewarded with a dividend of 20.9 sen per share — this represents a 100% dividend payout ratio, exceeding the company’s dividend policy of distributing a minimum of 80% of their net profit. Digi’s total shareholder return is 57.3% (including dividends) from 2012 to 2016, outperforming the KLCI’s return of 25.8% over the same period.
Globally, telecommunication companies are reinventing themselves to adapt to the fast-growing digital world. Over the past few years, Digi has been reshaping its business plans and implementing the necessary digital leaps to innovate and evolve around its customers’ needs, laying the foundation to capture the growth of the digital ecosystem.
Despite of the fact that challenging market conditions continue to persist, the management is still optimistic on Digi’s ability to give a resilient performance and sustainable returns in 2017. The company has more robust digital and internet infrastructure compared to 2016 which will assist Digi to meet its customers growing needs.
Read more: 5 reasons why Digi.com is on my watchlist
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