Published on 10 Dec 2020.
RAM Ratings has reaffirmed the respective AAA/Stable and P1 ratings of Digi Telecommunications Sdn Bhd’s (Digi or the Company) RM5 bil Islamic Medium Term Notes Programme (2017/2032) and RM1 bil Islamic Commercial Paper (2017/2024), which are subject to a combined limit of RM5 bil. The ratings reflects RAM’s view on Digi’s well-established position in the mobile services industry, superior profitability and robust cashflow.
The ratings are underscored by Digi’s close relationship with its ultimate shareholder, Telenor ASA, which holds a 49% stake. As part of the Telenor Group that boasts 180 mil subscribers and operations in nine countries, Digi gains an advantage by yielding economies of scale through coordinated procurement arrangements and network modernisation efforts, coupled with sharing of best management practices. The Company is vital to Telenor, accounting for 11% of the Group’s revenue and 14% of its operating profit before depreciation, interest and tax in 9M FY Dec 2020.
Digi’s subscriber base shrank amid the coronavirus pandemic (-6% y-o-y as at end-September 2020), especially for products targeting more price-sensitive customers. This was partially due to the subscriber base clean up done by the Company as they pivot their focus towards acquiring higher quality customers. Digi saw increased usage of its MyDigi app and leveraged off its digitisation efforts, minimising the interruption in customer engagement and relieving some pressure from the closure of its physical outlets during MCO. Digi still holds the second highest share of industry OPBDIT despite posting the lowest overall revenue, thanks to a market-leading OPBDIT margin (49.9% in 9M fiscal 2020) anchoring its already lean operations and excellent cost management.
Despite losing its leadership position in total subscribers, Digi has managed to expand its postpaid subscriber base, resulting in a healthier 28:72 postpaid to prepaid mix as at end-September 2020 (end-September 2019: 26:74). Management continues to seek growth opportunity through upselling core product segments such as home fibre packages or Phone Freedom 365 (a 24-month, interest-free device financing), in a move to be a convergence player. Although these are not new to the industry, Digi’s competitive pricing is envisaged to tempt more cost-conscious consumers into staying loyal to the brand while attracting new ones. We expect these focused priorities to positively impact Digi’s average revenue per user trend, albeit with a narrower profit margin.
As at end-September 2020, the Company’s adjusted debt load had eased to RM5.0 bil (end-September 2019: RM5.2 bil). This was because of muted capital expenditure (capex) and the management’s decision to strategically delay capex to 4Q 2020 following its latest announcement on Radio Access Network modernisation partnership with ZTE Corporation, their long term infrastructure equipment supplier. Digi’s debt-to-OPBDIT ratio eased from 1.69 to 1.64 times y-o-y while its funds from operations debt coverage broadened from 0.51 to 0.58 times. These figures remain supportive of its ratings.
Meanwhile, Digi’s spending on infrastructure is envisaged to stay unchanged. Its spectrum-associated capex will lighten as the 2300 MHz and 2600 MHz spectrum refarming exercises have been delayed until the end of 2021. Management continues its focus on enhancing capacity and coverage through the use of modenised technology with its latest radio access solutions sfrom ZTE Corporation whilst preparing for a 5G-enabled network. As Jendela is still evolving, any significant changes in the government plans especially regarding spectrum allocation and auction or 5G deployment might require us to revisit our capex assumptions.
All said, we anticipate Digi’s borrowings to ease over the next couple of years. Its earnings should remain robust, with an adjusted debt-to-OPBDIT ratio of 1.6 to 1.7 times in fiscal 2021 and 2022 while posting an FFODC of around 0.6 times. The Company’s gearing ratio is envisaged to stay flat as any moderation in leverage will be offset by a decline in its equity base, as it maintains a generous dividend payout ratio.
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Ratings on DiGi Telecommunications Sdn Bhd