Published on 06 Jan 2020.
RAM Ratings has reaffirmed the AAA/Stable/P1 ratings of Digi Telecommunications Sdn Bhd’s (Digi or the Company) RM5 bil Islamic MTN Programme (2017/2032) and RM1 bil Islamic CP Programme (2017/2024), which are subject to a combined limit of RM5 bil. The ratings reflect Digi’s well-established position in the mobile services industry, excellent profitability and robust cashflow.
On top of Digi’s strong stand-alone credit strength, the ratings have also considered its close relationship with its ultimate shareholder, Telenor ASA, a Norway-based telecommunication services provider with a 49% interest in the Company. Being part of the Telenor group that has 183 million subscribers and operations in nine countries, Digi enjoys economies of scale through coordinated corporate procurements and the sharing of best practices. Digi is considered one of Telenor’s key investments; the Company accounted for a respective 11% and 14% of Telenor’s revenue and operating profit before depreciation, interest and tax (OPBDIT) in 9M fiscal 2019.
Despite stiff competition, Digi has remained the biggest mobile operator in Malaysia by subscribers – a position it has maintained since 2016, with 11.3 million users as at end-September 2019. In addition, it has the second highest share of the market’s OPBDIT despite having a lower share of revenue, thanks to an industry-leading margin (53.6% in 9M fiscal 2019) that reflects its lean operations and cost efficiency.
Digi commands the biggest base of prepaid subscribers in the industry. However, its mix of prepaid and post-paid subscribers had changed to 74:26 as at end-September 2019 (end-December 2015: 85:15) as the Company had expanded its base of post-paid users, which tend to be more sticky and contribute higher average revenue per user. “As the market matures, industry players are seeking new growth areas such as the enterprise segment. Telecommunication companies are increasingly positioning themselves as digital companies, offering services typically rendered by technology firms,” highlights Davinder Kaur Gill, RAM’s co-head of Infrastructure and Utilities Ratings.
Digi’s adjusted debt load increased from RM3.5 bil to RM5.3 bil in 9M fiscal 2019, mainly due to the recognition of lease liabilities pursuant to the adoption of Malaysian Financial Reporting Standard 16 last year. Lease liabilities are higher than operating lease commitments under the previous accounting standard, largely owing to annual fees for spectrum rights. As such, the Company’s adjusted debt-to-OPBDIT ratio had climbed up to 1.6 times (fiscal 2018: 1.1 times) while its adjusted funds from operations debt coverage (FFODC) had thinned to an annualised 0.54 times (fiscal 2018: 0.80 times), although still deemed robust.
While additional outlay is expected for upfront spectrum fees in 2020, Digi’s cash reserves had increased from RM367 mil to RM748 mil q-o-q as at end-September 2019, following a sukuk issuance in September 2019. We expect its adjusted debt-to-OPBDIT ratio to hover around 1.6-1.7 times in fiscal 2020 and 2021 while its adjusted FFODC is likely to come in at about 0.5 times. Based on our projections, the Company has headroom for another RM2.4 bil of adjusted debts (from its level in September 2019) before its adjusted FFODC breaches the 0.40 times threshold for its ratings.
Lim Yu Cheng, CFA, FRM
(603) 3385 2492
(603) 3385 2577
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Ratings on DiGi Telecommunications Sdn Bhd