Competition in the telecommunications space has never been more intense. Yet DiGi.Com Bhd remains a clear winner in terms of highest return on equity, bagging The Edge Billion Ringgit Club’s Highest Return on Equity Over Three Years Award for the fourth year running this year.
The Edge BRC Company of The Year in 2013, DiGi.Com is the only BRC member to have appeared on the top 20 list, in the running for the top award, for all eight years the BRC award has been in existence.
DiGi.Com’s ROE came in at 314% in FY2016, the best it has churned out in the last three years. ROE stood at 286% in FY2015, and in FY2014, it was 301%, bringing adjusted and graduated ROE over three years to 303% — well ahead of its peers.
DiGi.Com’s high ROE is largely due to its high dividend payout and Capital return that keeps its shareholders’ equity low. Last year, it paid shareholders a net dividend per share of 20.9 sen, or RM1.63 billion in total, representing 100% of its net earnings.
But DiGi.Com will have its work cut out sustaining this level of performance, given the fast-paced changes taking place in the industry and brutal competition.
The group is clear on the fact that it wants to continue driving innovation in a bid to attract customers, while focusing on sustaining margins. CEO Albern Murty told reporters recently that DiGi.Com would stick to its strategy of moving away from segments where margins are very diluted.
“You can win on top line but there is also going to be an impact on the earnings before interest, taxes, depreciation and amortisation (Ebitda) margins, which [is a risk] we do not want to take,” he said.
DiGi.Com has done a decent job defending its subscriber base. It was just last year that it pulled off a coup, coming in from the underdog spot to beat its two bigger rivals to become the country’s largest mobile operator in terms of subscribers.
For the second quarter ended June 30 this year, it managed to grow the base by 2.2% over the first quarter to RM12 million. Its average revenue per user improved slightly to RM41 from RM40. However, service revenue continued its quarterly decline for the third consecutive quarter, albeit this time at a slower pace of 1.3% to RM1.45 billion, thanks to stronger sequential postpaid growth and stabilising prepaid operations.
“We are happy with the latest results as we focused on our margins and delivered the margins that we were expecting, getting a 46% Ebitda margin,” says Murty. Ebitda had grown by one percentage point, quarter on quarter.
Nonetheless, in anticipation of keener competition ahead, DiGi.Com lowered its service revenue guidance for FY2017 to a low, mid-single digit decline. It had initially expected flat growth.
Murty says the group will continue to focus on the postpaid segment and improve operational efficiencies for the rest of the year.
Indeed, for the second quarter, DiGi.Com continued to grow its postpaid subscriber base with net additions of 103,000, or a 4.7% sequential increase, to 2.3 million. It still has among the smallest postpaid base among the telcos, but is quickly closing the gap. As a matter of comparison, market leader Maxis Bhd has a 2.8 million postpaid base.
Meanwhile, DiGi.Com’s prepaid subscribers, which make up the bulk of its total subscribers, also grew, by 151,000 or 1.6% to 9.7 million. But there will be even more competition ahead in the prepaid segment given that rival Telekom Malaysia Bhd’s “webe” prepaid plans are expected to be made available as early as 3Q2017.
Moving foward, DiGi.Com is expected to focus on monetising its digital services.
“Amid continued competition and weak consumer confidence, DiGi.Com is expected to focus on monetising its wide 4G-LTE and LTE-A networks to strengthen its postpaid position in the market and to Capture opportunities from growing internet demand in the prepaid segment,” says UOB Kay Hian Research in a July 13 report.
While DiGi.Com is set to benefit from the additional spectrum allocated to it from 2H2017, analysts expect the company to show subdued earnings in the near-term, given the intense prepaid competition. Most analysts that track the stock have a “hold” call on it but say there could be upside if the positive traction in the postpaid segment is kept up.