Telecommunications Weekly Review: 1st – 7th December 2008
· Can we still expect special dividends from DiGi?
DiGi CEO Johan Dennelind said DiGi will need to go to the debt market next year to get some funding for its capex in the region of RM1.1bn to RM1.3bn next year. The debt portion is expected to be small, as he wants to avoid putting DiGi’s balance sheet at risk. DiGi’s debt stood at RM200m as at end-Sept, and it also has an existing RM700m credit facility not drawn down yet.
The increase in capex to roll out 3G services raises some doubts among investors on the sustainability of DiGi’s aggressive dividend payouts, in particular its special dividends. However, we believe DiGi still has the capacity to maintain its special dividends but with flattish growth, given its strong operating cash flow, relatively decent profitability growth and that only a marginal increase in capex is required to roll out 3G services. We expect DiGi to spend about RM1.1bn in capex in 2009, which is the lower end of its guidance. This should be the more likely scenario as prudence is required in view of a deteriorating macro economic environment. In addition, DiGi has a historical pattern of spending less than its guidance. Essentially, we believe DiGi will spend only an additional RM170m in capex in 2009, given that capex spending in 2008 is RM930m. Cash reserves are still sizeable at RM512m as at end-Sept.
We estimate DiGi to generate about RM1.95bn in operating cash flow in 2009. Assuming DiGi maintains its FY08 dividend payout into 2009, DiGi will pay out RM1.47bn in net dividends. With 2009 capex at RM1.1bn, DiGi will be outlaying RM2.57bn in cash against its RM1.95bn in operating cash flow. To meet its dividend commitments and capex, DiGi will need to borrow RM620m to cover the shortfall.
Assuming all else remain constant, DiGi’s debt will rise by an additional RM1.86bn to RM2.06bn to continue paying special dividends for the next 3 years. This will bring its gearing ratio from 0.1x to c.0.6x in FY11 which is still manageable for a company with strong cash flow generating ability.
DiGi’s net gearing ratio will likely be considerably lower as it cash reserves grow going forward.
In sum, DiGi should be capable of gearing up to optimize its balance sheet to meet its capex requirements for its 3G roll out and still maintain its special dividends going forward.
· MAINTAIN NEUTRAL on the sector
TMI continues to be hammered. TMI’s share price took another heavy beating during the week, partly due to the weakening Rupiah which means lower earnings contributions from Excelcomindo. Excelcomindo contributes about 40% of TMI’s earnings, and the weakening Rupiah would lead to lower earnings translation for TMI. Since October 1, the Rupiah has depreciated by 20% versus the Ringgit. The Rupiah faces further downside risk in view of the 25 basis points cut in interest rate from 9.5% to 9.25% by the Central Bank of Indonesia yesterday. Further cuts are highly possibly given the worsening macro economic conditions worldwide, which would put further pressure on the Rupiah.
EPF scoops up local telecoms’ shares. In a filing on November 24, EPF bought stakes in TM and TMI, while selling down DiGi shares. EPF bought an additional 651,300 shares in TMI, bringing EPF’s effective stake to 14.1%. EPF also added 824,700 shares to its equity holding in TM, which it now has a 15.2% stake. 205,200 DiGi shares were sold, bringing down EPF’s equity holding to 9.7% in DiGi.