STRATEGIC FINANCIAL REVIEW OF DIGI.COM BHD

Nottingham University Business School
MBA Programmes
ACCOUNTING AND FINANCE (N14M01)
STRATEGIC FINANCIAL REVIEW OF DIGI.COM BHD

GROUP MEMBERS:
SHANMUGA PILLAIYAN (010194)
KEVIN CHOO (010226)
GURMEET SINGH (002967)

ORIGINAL

Accounting & Finance (N14M01)
Strategic Financial Review of DiGi.Com Berhad
TABLE OF CONTENTS
1.0

EXECUTIVE SUMMARY ..................................................................................................................... 3

2.0

KEY ISSUES............................................................................................................................................ 5

2.1

LONG TERM SUSTAINABLE GROWTH DOES NOT LOOK PROMISING .......................................................... 5

2.2

NET PROFIT MARGINS ARE NOT GROWING IN TANDEM WITH REVENUE GROWTH ................................. 11

2.3

GEARING IS INCREASING ...................................................................................................................... 18

2.4

SHORT TERM LIQUIDITY IS OF CONCERN............................................................................................... 22

2.5

SPECIAL NOTE: ROE IS DISTORTED BY CAPITAL STRUCTURE ............................................................... 23

3.0

CONCLUSION ...................................................................................................................................... 26

3.1

APPROACHING MILESTONES ................................................................................................................ 26

3.2

SUMMARY OF RECOMMENDATIONS ..................................................................................................... 28

4.0

APPENDIX ............................................................................................................................................ 29

4.1

FINANCIAL FIGURES – DIGI BHD ......................................................................................................... 29

4.2

FINANCIAL FIGURES – XL AXIATA ...................................................................................................... 31

4.3

FINANCIAL FIGURES – M1 ................................................................................................................... 33

4.4

REFERENCES ........................................................................................................................................ 35

Word Count: 4171

Page |2


1.0 EXECUTIVE SUMMARY
DiGi has performed admirably over the last five years, in terms of operational efficiency,
growth and share holder value, culminating in the highest gross revenue level in its
corporate history at approximately RM 5.5 billion in 2010 (refer to Appendix 1).
However, a closer look at our financials have revealed several trends that may have long
term repercussions on our ability to successfully surmount the challenges that lay ahead
over the next few years.
Long term sustainable growth does not look promising
Net profit margin is not growing in tandem with revenue growth
Gearing is increasing
Short-term liquidity position is precarious
In order to derive further insights into our performance, we have also benchmarked our
performance with 2 other players based in different markets, namely XL Axiata in Indonesia
and M1 in Singapore. These companies were selected on the following basis:
DiGi1, XL2 Axiata and M13 are currently the third ranked telcos in their
respective markets.
All 3 telcos deploy similar telecommunication technologies (GSM, GPRS,
UMTS, HSPA) and have similar product offerings4

Hendrik Clausen (2011), Analyst Briefing, 22 September 2011, DiGi Bhd..
Axiata Group Berhad (2010), 3 rd Quarter 2010 Analyst and Investor Briefing, 24 th November 2010,
Axiata Group Berhad
3 M1, (2011) Investor Presentation Jan 2011, available at:
http://m1.com.sg/M1/CMA/About_Us/Corporate_Information/IR/PDF/Investor%20Presentatio
n%2019%20Jan%202011.pdf (accessed on 7th November 2011)
4 1. DiGi Berhad, www.digi.com.my (accessed on 5th November 2011). 2. XL Axiata, www.xl.co.id
(accessed on 6th November 2011). 3. M1, www.m1.com.sg (accessed on 5th November 2011)
1
2

Page |3

To have a comparison with markets that have different mobile penetration
rates. XL Axiata is from Indonesia a growth market (around 85% mobile
penetration) and M1 is in Singapore which is a mature market (around 155%
mobile penetration). Malaysia is between these two markets as a maturing
market5 (around 120% mobile penetration)
Over the long term, we need to be financially prepared for the milestones such as the Telco
Spectrum Auction6, DiGi’s 3G license expiry in 20187 and the Long Term Evolution (LTE)
roll-out to enhance mobile data services8
The following are our key recommendations to address both the highlighted issues and the
financial challenges presented by these milestones.
Dividend payout policy to be set at a maximum of below 100% of net profit
To focus on improving net profit margins by increasing monthly Average
Revenue Per User (ARPU), and reducing 3rd party mobile traffic charges.
Use more internally generated funds to fuel future growth.
Short term debt facility should be arranged to mitigate short-term liquidity
risks.

Central Intelligence Agency, World Factbook, available at:
https://www.cia.gov/library/publications/the-world-factbook/index.html (accessed on 9th
November 2011)
6 Kelvin Goh (2011), “Telecommunication, Muffled by regulation and competition”, CIMB Research
Reports (17 Feb 2011). CIMB Bhd.
7 Kelvin Goh (2011), “Telecommunication, Muffled by regulation and competition”, CIMB Research
8 Hendrik Clausen (2011) , Analyst Briefing, 22 September 2011, DiGi Bhd
5

Page |4


2.0 KEY ISSUES
Despite DiGi’s many successes over the years, we have noticed several trends arising from
our analysis of several financial indicators that do not appear to be benign. These issues will
be detailed in the following sections.

2.1
2.1.1

Long term sustainable growth does not look promising
Indicators

Although DiGi’s financial performance is looking very healthy in the light of its balance
sheet and income statement reflecting asset growth and year-on-year growth of topline
revenue (refer to Appendix 1), we are concerned about its prospects for future growth.
The following is a table showing some of the major financial indicators that have raised our
concerns over DiGi’s long term growth.
Indicators for DiGi
Revenue growth rate

2006

2007

2008

2009

2010

28.35%

19.04%

10.08%

1.68%

10.69%

Sustainable Growth Ratio

0.29

-0.11

-0.19

-0.25

-0.13

Equity Reserves (RM’000)

1,677,401

1,502,645

1,819,422

1,443,718

1,268,872

Altman Z-score

1.15

1.53

1.32

1.17

1.19

Dividend Cover

278.82

85.89

76.94

72.71

87.07

Diagram 2.1.1: Key financial indicators of DiGi related to long term growth

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All of the Z-scores between 2006 and 2010 are below the 1.8 watermark, which theoretically
signals that the company is in distress9. While the z-scores do not indicate that DiGi is in
immediate danger of bankruptcy (especially when all these indicators are taken in
conjunction with DiGi’s strong cash flow and balance sheet), it does however indicate that
DiGi is in a grey zone that is fairly worrying in terms of long term business sustainability
should this trend continue on.
As presented in the table above, it can clearly be seen that equity reserves have also been
declining steadily since 2008, even though overall revenue growth and market share has
been on the rise during the same period. Such divergent trends warrant a closer look.
Also, one can see that DiGi’s dividend cover is substantially lower from 2007 onwards, and
it appears to be trending downwards. Some improvement is seen in 2010 which can be
attributed to DiGi achieving its highest gross revenue levels ever.
2.1.2

Root Cause

It appears that the biggest culprit causing the negative trend in the sustainable growth ratio
is the fact that DiGi has been aggressively and excessively delivering more dividends back
to the shareholders every year since 2007. Looking at the dividend payout ratios listed in the
table below, DiGi has been paying out between 15% - 40% more than its net earnings as
dividends every year since 2007. This has had a detrimental effect on DiGi’s equity reserves
and has severely diminished retained earnings.

9

Investopedia, Altman Z-scores, available at:
http://www.investopedia.com/terms/a/altman.asp#axzz1eKZSDomX (accessed on14th November
2011)

Page |6


Indicators for DiGi

2006

Dividends per share

2007

0.39

Dividends paid (RM'000)

2008
1.65

2009
1.93

2010
1.77

1.74

288,900 1,237,351 1,500,692 1,376,175 1,352,850

Dividend Payout Ratio

0.36

1.16

1.32

1.38

1.15

Diagram 2.1.2: Key financial ratios related to dividend payout

2.1.3

Comparisons with XL and M1

The following graph shows the ability of each company to pay dividends to its shareholders
based on a factor of its earnings vis-à-vis their internal dividend policy during a particular
year. It appears that both DiGi and M1 are in a very good position to carry out its targeted
dividend payouts to its shareholders. In XL’s case, their performance, especially in 2008 is
simply not good enough to justify high dividend returns.
Dividend Cover Comparison
300.00
250.00
200.00
DiGi

150.00

XL
100.00

M1

50.00

0.00
2006

2007

2008

2009

2010

Diagram 2.1.3: Comparison of dividend cover between DiGi, XL & M1

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The following graphs compare the sustainable growth rate and dividend payout ratios
between DiGi, M1 and XL. It is apparent that the sustainable growth rates for XL and M1 are
fairly volatile, quite possibly reflecting the dynamism of their respective mobile
telecommunications market.
DiGi, in comparison with XL and M1 appears to be the worst off among the three in terms of
this indicator, even though it is the only one among the three that has consistently recorded
an average of more than 10% revenue growth year-on-year.
This is supported by the fact that DiGi appears to have the highest dividend payout ratio
among the three telcos, and is the only one among the three that is consistently paying out
more dividends than their net profits.

Dividend Payout Comparison
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00

DiGi
XL
M1

2006

2007

2008

2009

2010

Diagram 2.1.4: Comparison of dividend payout ratio between DiGi, XL Axiata & M1
M1 appears to have the most sensible dividend payout plan where the dividend payout
ratio is less than 1, which implies that they retain some earnings for possible use in the
future, while at the same time delivering value to their shareholders. This is reflected in their
sustainable growth indicators which are in the positive region. The indicators appear low

Page |8

mainly because, as mentioned earlier, the Singaporean mobile telecommunications market is
already mature and saturated.
Sustainable Growth Rates Comparison
0.50

0.40
0.30
0.20

DiGi

0.10

XL

0.00

M1

-0.10

2006

2007

2008

2009

2010

-0.20
-0.30

Diagram 2.1.5: Comparison of Sustainable growth rate between DiGi, XL & M1
Having not made any dividend payments in 2008 and 2009 (despite a rapid recovery from
net loss in 2008 to net profit in 2009), XL’s low dividend return policy is helping it achieve
significant numbers in sustainable growth, as compared with the other 2 telcos.
2.1.4

Recommendations

The current rate of dividend payouts is not conducive to long term growth. Cash reserves
will continue to dwindle, and it will place DiGi in a difficult position should there be cash
flow problems or a large purchase consideration. In the light of the challenges that face DiGi
in the medium term (e.g. spectrum auction bidding, LTE rollout),
DiGi should consider being more conservative in managing it’s retained earnings in order to
be better equipped to deal with the capital expenditure and operational expenses that will be
incurred as a result of these challenges. Rather than rely solely on long term financing in
order to finance said expenditure, we recommend that the current dividend policy be

Page |9

amended and revised to a much lower rate to increase the amount of internally generated
funds that will be available to finance the required capital expenditure.
The maximum dividend payout rate should be set as a percentage of net profit and be
significantly below 100%. This will help arrest and reverse the decline in shareholder equity,
and help reduce financing costs in the annual income statement. DiGi’s strong cash flow
position should not be taken for granted to be the main engine for servicing loans, especially
when the global economic climate is still uncertain ever since the global financial crisis of
2009.

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2.2
2.2.1

Net Profit Margins are not growing in tandem with revenue growth
Indicators

DiGi has seen consistent revenue growth from 2006 to 2010, during which revenue has
increased almost 50% from RM3.6 Billion in 2006 to 5.5 Billion in 2010. Over the same period
however, this growth did not translate into a parallel increase in profit margin growth. In
fact, gross operating margin has been decreasing since 2008 to 2010.
Diagram 2.2.1 illustrates the general trend between Gross Revenue, Gross Operating
Margin, EBITDA Margin and Net Profit Margin.
Comparison between revenue growth against margin

5,459,851

4,851,056 4,932,640
4,407,025

3,702,100

79.0%

79.8%

46.3%

48.3%

21.8%

24.1%

77.5%

76.3%

74.3%

45.0%

42.5%

43.4%

20.3%

21.6%

23.5%

Total Revenue

Gross operating
margin
EBITDA margin
Net Profit margin

2006

2007

2008

2009

2010

Diagram 2.2.1: Comparison between revenue against margins
Table 2.2.2 illustrates the growth rates for revenue, Gross Operating Margin and EBITDA
margin. From Table 1.1 it is clear that revenue has had a consistent positive growth where as
gross operating margin has been consistently contracting from 2008 to 2010. The important
issue that is revealed here is that both revenue growth and gross operating margin are
trending divergently.

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Year
2007
Revenue Growth Rates

2008

2009

2010

19.04%

10.08%

1.68%

10.69%

Gross Operating Margin Growth Rate

1.12%

-2.86%

-1.54%

-2.79%

EBITDA Margin Growth Rate

4.17%

-6.75%

-5.50%

2.10%

Diagram 2.2.2: Growth rate for revenue, gross operating margin & EBITDA margin
The positive growth in DiGi’s EBIDTA for the year 2010 (refer to Table 2.2.2) was due largely
to internal cost savings initiatives10. OPEX (excluding traffic charges) only grew a marginal
1.25% from 2009 to 2010. These internal cost reductions also helped to offset the large
increase in material cost in 2010.
These internal cost saving efforts even though effective in the short term will be hard to
maintain over an extended time frame. At present DiGi has already reached a high level of
efficiency relative to XL and M1 (refer to Diagram 2.2.5 below).

10

Hendrik Clausen and Terje Borge (2011), Results Briefing Q4 2010, DiGi Bhd.

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2.2.2

Comparison with XL Axiata and M1

XL Axiata shows a strong correlation between revenue growth and gross operating margin
growth.

Diagram 2.2.3: Revenue & Gross Operating Margin trend of XL Axiata
In contrast with XL, M1 displays a similar trend as DiGi where gross operating margin is
declining even though revenue is growing. According to a CIMB Research Report11, the
margin erosion of Telcos in Singapore is due to increased smartphone subsidies and high
startup cost of next generation broadband network.

11Kelvin

Goh (2011), “Telecommunication, Muffled by regulation and competition”, CIMB Research

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Diagram 2.2.4: Revenue & Gross Operating Margin trend of M1

OPEX/revenue trend
70.0%
60.0%
Percentage

50.0%
40.0%

Digi

30.0%

XL Axiata

20.0%

M1

10.0%
0.0%
2006

2007

2008

2009

2010

Diagram 2.2.5: Comparison of OPEX/Revenue between DiGi, XL Axiata & M1.
The similar profit margin trends of DiGi and M1 can possibly be attributed to the fact that
they are operating in markets where mobile penetration is above 100%, and therefore we can
infer that they are subject to keener competition to acquire more subscribers and reduce
subscriber churn. XL Axiata, on the other hand, operates in a market with 85% penetration,
which by definition, is still a growing market.
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2.2.3

Root cause analysis

The two major components of gross operating margin are revenue and cost of service (COS)
consists of traffic charges and material costs12. The traffic cost has had a higher growth rate
compared to revenue from the year 2007 to 2009. This results in a decreasing gross operating
margin.

Revenue Vs. Traffic Charges
30.00%

Growth Rate

25.00%
20.00%
15.00%

Revenue

10.00%

Traffic Charger

5.00%
0.00%
2007

2008

2009

2010

Diagram 2.2.6: Growth rate of revenue and traffic charges
DiGi has relatively smaller network coverage in Malaysia in comparison with Maxis and
Celcom13, thus DiGi has had to be reliant on Celcom & Maxis networks for coverage via
inter-connection agreements.
Traffic charges refer to interconnect charges and domestic roaming charges. When DiGi
customers make calls to a non-DiGi number, DiGi will have to pay interconnect charges to
the other mobile network operator. When DiGi customers are outside DiGi’s network

12


13

Insider Asia, 2011, Steady Gains seen for DiGi, available at: http://www.theedgemalaysia.com/inthe-financial-daily/190317-steady-gains-seen-for-digi.html (accessed on 7th November 2011)

P a g e | 15

coverage area, they are able to utilise other Malaysian mobile operators’ network
infrastructure to make calls. DiGi will incur “Domestic roaming” charges when such calls
are made.

Traffic Charges as a percentage of
revenue
30.0%
Percentage

25.0%
20.0%

Digi

15.0%

XL Axiata

10.0%

M1

5.0%
0.0%
2006

2007

2008

2009

2010

Diagram 2.2.7: Traffic charges as a percentage of revenue
A recent trend contributing to service cost is the cost of material which jumped from 62
million in 2009 to 217 million in 2010. This 250% increase is due to the high cost of subsidy of
mobile devices14. DiGi has started promoting mobile broadband services bundled with
mobile devices. These devices such as iPhone, BlackBerry and Galaxy Tabs are heavily
subsidised to encourage take up. It is expected that in the long run, monthly subscription
charges will help offset these subsidies. Smartphone subsidies are usually intended to
accelerate the take-up rate of mobile internet services15.
The revenue growth rate is slowing due to a steady decline in ARPU, despite a continuous
growth in subscriber base. The trend in decreasing ARPU is driven by price reduction and

14Hendrik

Clausen and Terje Borge (2011), Results Briefing Q4 2010, DiGi Bhd.
Daily,
(2010),
DiGi
Prepaid
Revenue
gains
traction,
available
http://www.theedgemalaysia.com/in-the-financial-daily/165458-digi-prepaid-revenue-gainstraction.html (accessed on 7th November 2011)

15Financial

at:

P a g e | 16

substitution by cheaper services16. In our opinion, traditional services, such as voice & SMS
(short messaging service), will continue to experience extensive pricing pressures because of
they are considered a commodity, and are subject to the vagaries of price competition. In
addition, online services such as instant messaging and VOIP calls tend to cannibalise SMS
and voice services revenue, resulting in overall lower ARPU.

DIGI ARPU
120

Ringgit MAlaysia (RM)

100
80
Prepaid

60

Postpaid
Blended

40

20
0
2006

2007

2008

2009

2010

Diagram 2.2.8: DiGi’s ARPU trend from 2006 to 2010
2.2.4

Recommendations

Increase ARPU
Although the industry trend is towards lower ARPU, clear strategies can be adopted to
improve ARPU:
a) Grow customer segment with higher ARPU
b) Encourage use of Value Added Services (VAS)

16MCMC

(2007), Trends and Markets in Malaysian Mobile Services, volume 5, Malaysian
Communications and Multimedia Commission

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High ARPU customer segments are postpaid customers and especially corporate postpaid
customers. As illustrated in Diagram 2.2.8, postpaid ARPU is almost twice that of prepaid
ARPU. Currently, prepaid users form 80% of DiGi's customer base. A higher percentage of
postpaid customers will help increase the blended ARPU. VAS such as ring tones, Mobile
Application sales can help to increase ARPU. More marketing effort should be focused on
popularising VAS among the customer base. DiGi should also look into identifying “killer”
apps/services that can be used to spearhead the growth in VAS.

Reduce Cost of Traffic
Cost of traffic can be addressed via an expansion of DiGi’s network infrastructure or via
strategic partnerships with a local telco operator. The option to expand DiGi’s network will
be a very capital intensive option and would take a considerable amount of time to realise its
financial benefit. As such we recommend a strategy to enter in a strategic alliance with
Celcom to share network infrastructure for 2G & 3G services. DiGi and Celcom are already
collaborating

to

share

transmission

towers17.

Further

detailed

study

on

the

structure/framework of the network sharing will need to be conducted. DiGi should focus
CAPEX expenditure on developing 4G (LTE) network infrastructure.

2.3

Gearing is increasing

DiGi’s gearing has been increasing dramatically since 2008, (refer to Diagram 2.3.1). The
steep rise in gearing in 2009 was due to long term borrowings jumping from RM 100 million
in 2008 to RM 772 million in 2009.

17Sidhu

B.K. (11 Jun 2010). Celcom and DiGi to collaborate, The Star[Online]. Available at:
http://biz.thestar.com.my/news/story.asp?file=/2010/6/11/business/6448138&sec=business
[accessed on 22 November 2011]

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Gearing trend
0.90
0.80
0.70
Ratio

0.60
Gearing (Debt/Equity)
ratio

0.50
0.40

Gearing (Debt/EBIDTA)

0.30
0.20
0.10
0.00
2006

2007

2008

2009

2010

Diagram 2.3.1: DiGi’s gearing is trending upwards
This increase can be attributed to the implementation of DiGi’s plans to modernise its
infrastructure to improve the quality of its service as well as to drive cost efficiency18. DiGi
has invested a total of RM720 million in capital expenditure, of which a substantial portion
was allocated for expanding its mobile broadband and mobile internet footprint. It also
enhanced the capacity and quality of its 2G network to serve its growing number of
customers19.

18Hendrik

Clausen (2011) , Analyst Briefing, 22 September 2011, DiGi Bhd
Bhd.
2011,
Annual
Report
2009
–
2010
[online].
Available
http://www.DiGi.com.my/aboutDiGi/investor/index.do?sec=6 (Accessed 15 November 2011)

19DiGi.com

at

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Axis Title

DiGi's Debt to Equity Progression
2000000
1800000
1600000
1400000
1200000
1000000
800000
600000
400000
200000
0

Equity
Debt

2006

2007

2008

2009

2010

Chart 2.3.2: DiGi’s Debt-to-Equity progression over five years
In comparison to XL Axiata and M1, DiGi still has a relatively low gearing rate as measured
by debt/EBITDA. However, DiGi’s debt level looks large when measured by debt/equity
due to DiGi’s small and shrinking equity.

Gearing Trends (DEBT/EBIDTA)
4.00
3.50
3.00
Ratio

2.50
DIGI

2.00

XL Axiata

1.50

M1

1.00
0.50
0.00
2006

2007

2008

2009

2010

Diagram 2.3.3: Gearing (Debt/EBITDA) trend of XL Axiata & M1

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DiGi has strong cash flow from operations that allows us to easily cover our interest
obligations20. The figure below compares the interest cover between DiGi, XL Axiata & M1.
Prior to 2009, DiGi had a far superior interest cover rate to the other two telcos. However,
DiGi’s interest cover has since been trending downwards and in 2010 was below that of M1.

Interest cover
140.00
120.00
100.00
DIGI

60.00

XL Axiata

40.00

Ratio

80.00

M1

20.00
0.00
2006

2007

2008

2009

2010

Diagram 2.3.4: Comparison of Interest cover trend between DiGi, XL & M1
Historically speaking, DiGi’s debt levels and ability to service those debts appears more
favourable in comparison with M1 and XL. However, DiGi’s debt levels seem to be
increasing, and although interest cover is still very much in the positive, it has dropped
dramatically since 2008 and is now slightly below that of M1.
Steps should be taken to reverse this declining trend. Our recommendation is not to take on
further debt unless absolutely necessary. Instead of the debt market, we recommend the
following two sources for additional cash:

20


P a g e | 21

a) Internally generated funds from increased retained earnings
b) Additional capital from shareholders

2.4

Short term liquidity is of concern

Diagram 2.4.1 illustrates the overall trend of the acid test ratios for DiGi, XL Axiata & M1.
DiGi has the lowest relative short term liquidity as measured by the acid test ratio from 2007
to 2010. Between 2007 and 2010, the short term liquidity levels have been holding steady.

Acid Test
0.80
0.70
Acid test ratio

0.60
0.50

Digi

0.40

XL Axiata

0.30

M1

0.20
0.10
0.00
2006

2007

2008

2009

2010

Diagram 2.4.1: Acid test ratios as a measure of short term liquidity
Given that DiGi has consistently had these low levels of short term liquidity in the last 5
years and yet have still been able to grow in terms of revenue and subscriber base, as well as
being able to invest in infrastructure, we see no reason to be overly alarmed over the results
of the acid test. However, to be on the safe side, short term financing should be arranged
and kept as a back-up in order to mitigate short-term liquidity risks.

P a g e | 22

2.5

Special Note: ROE is distorted by capital structure

While the following indicators do not impact on our study of DiGi’s growth potential, the
anomalies presented by these indicators are worth noting.
ROE has shown a strong growth since 2006 to 2010. In the same time period, ROA and
ROCE have been relatively flat.

Percentage Return

Measures of return
100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%

ROE
ROA
ROCE

2006

2007

2008

2009

2010

Diagram 2.5.1: ROE is diverging from other measures of return such as ROA & ROCE
Diagram 2.5.1 compares the Financial Leverage Coefficient (ROE/ROA) between DiGi, XL
Axiata and M1. DiGi has the highest coefficient among the three telcos. This indicates that
DiGi has a high debt to equity ratios (gearing) as compared to the other telcos.
Telco

2010

DiGi

3.99

XL Axiata

1.83

M1

2.97

Diagram 2.5.2: Financial leverage coefficients for the year 201
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The diagram below illustrates the three key drivers of ROE and their values from 2006 to
2010. It is clear that financial leverage has grown significantly where net profit margin has
declined and asset turnover only grew marginally. As such we can confidently conclude that
the growth in ROE is primarily driven by the growth in financial leverage.
ROE decomposition
Net Profit margin

2006

2007

2008

2009

2010

21.8%

24.1%

23.5%

20.3%

21.6%

Asset turnover

0.91

1.14

1.04

1.04

1.06

Financial leverage

2.32

2.45

2.45

3.11

3.81

45.97%

67.35%

60.13%

65.76%

87.48%

ROE

Diagram 2.5.3: Key drivers of ROE
Financial leverage is growing due to increase in borrowing and a reduction in shareholder
equity due to reduction in retained earnings. Retained earnings have been declining due to
dividend payouts exceeding net profit for the last several years.
DiGi conducted two capital repayment exercise in 2005 and 2006 respectively21. More than
RM1 billion was paid out in these two capital repayments exercises resulting in a large drop
in shareholder capital. Shareholder capital experienced a 90% drop from the year 2005 (RM
750 million) to the year 2006 (RM 75 million).

21

DiGi, 2006, Press Release, available at:
http://www.DiGi.com.my/aboutDiGi/media/mr_press_det.do?id=2661&pgPoint=4&yea
r=2006 (accessed on 5th November 2011)

P a g e | 24

As the ROE figures are not a good reflection of DiGi’s performance, we recommend that it
not be used as the critical measure to evaluate true performance. We recommend to utilise
ROA & ROCE as a more realistic measure of the company’s performance.
We also recommend that for future cash needs that we consider raising new capital. This
could be done via rights issues to all current shareholders or sales of new shares to strategic
partners.

P a g e | 25


3.0 CONCLUSION
3.1

Approaching Milestones
There are several challenges that await DiGi in the medium to long term that will
have significant financial implications.

3.1.1

Telecommunications Spectrum Re-farming22
The next few years will see the expiry of various blocks of spectrum currently held
and utilized by the local telecommunications providers. This will lead to a bidding
war between the major players for the spectrum blocks, as the incumbents (such as
Maxis and Celcom) will strive to protect their currently held spectrum and other
players, such as DiGi will attempt to acquire more spectrum blocks. This means that
DiGi will incur a large capital expenditure in the next couple of years23.

3.1.2

3G License Expiry
DiGi’s current 3G license is sub-leased from Time Dot Com Berhad and is due to
expire in 201824. DiGi will need to be able to finance the renewal of the lease, which
will cost at least another RM695 million25.

22Surin

Murugiah, The Edge (2010), Spectrum Refarming in the Works, available at
http://www.theedgemalaysia.com/in-the-financial-daily/166717-spectrum-refarming-in-theworks.html (accessed on 7th November 2011)
23Fong Min Hun, The Edge (2010), Spectrum Refarming could see Telcos Capex Rise, available at:
http://www.theedgemalaysia.com/features/168450-corporate-spectrum-refarming-could-seetelcos-capex-rise.html (accessed 7th November 2011)
24Telenor, 2011, DiGi Business Description, available at: http://www.telenor.com/en/investorrelations/company-facts/business-description/DiGi (accessed on 7th November 2011)
25MIDF Research, 2009, Equity Beat (DiGi.com Bhd), available at:
http://www.midf.com.my/project/midf/media/2009/05/04/094112-183.pdf (7th November 2011)

P a g e | 26

3.1.3

Long Term Evolution Rollout
In order to maintain its’ positioning in the mobile broadband space, DiGi will need to
invest a lot of capital expenditure in LTE technology that will further enhance its’
mobile data offerings which is 4 times faster than the current HSPA+ technology26.
LTE is widely considered as 4G technology and is the next logical step in the
technological evolution of the mobile telecommunications industry27.

http://www.DiGi.com.my/aboutDiGi/media/mr_press_det.do?id=6280&pgPoint=3&year=2011
(accessed on 7th November 2011)
27Ayvazian. B, (March 2011), Heavy Reading, LTE Operator Business Case and Adoption Forecast, pp.
3-5.
26

P a g e | 27


3.2

Summary of Recommendations

The milestones mentioned above poses a significant financial challenge on future cash flow
for DiGi, and DiGi needs to be financially prepared to meet these challenges. Over the past 3
years, the strategy to ensure high short term returns to the shareholders has diminished the
net assets of the company. In order to arrest this development, DiGi shareholders must be
persuaded to take a long term view of the business, especially in the light of today’s
uncertain economic climate, both globally and locally.

The following is a recap our key recommendations to address the highlighted concerns.
Maximum dividend payout policy to be set at well below 100% of net profit
Implement strategies to grow net profit margins via increased ARPU and
reduced traffic costs
Future funding needs should be fulfilled via internally generated funds or
capital market rather than the debt market.
Short term debt facility should be arranged to mitigate short-term liquidity
risks.

P a g e | 28


4.0APPENDIX
4.1

Financial Figures – DiGi Bhd28
Financial Ratios

Description
2006

Profitability Analysis
Net Profit margin
Gross operating margin
Net operating margin
EBITDA margin
Return on equity (ROE)
Return on assets (ROA)
Return on capital
employed (ROCE)
Financial leverage
coefficient
Asset Utilisation Analysis
Total asset turnover
Long-term asset turnover
Receivables turnover
OPEX (excluding
COGS)/Revenue
Traffic charges / revenue
Financial Strength Analysis
Long-term solvency risk
Analysis
Gearing (Debt/equity
ratio)
Interest cover
Dividend cover

Net profit after tax /Sales
Sales less Cost of
sales/sales
Net profit before interest
and tax/sales
EBITDA/sales
Net profit after
tax/equity
Net profit before
interest/Total assets
on LT-debt/Equity + LTdebt

Acid test (or quick ratio)
Days inventory
outstanding
Credit given

28

Year
2008

2009

2010

Profit before interest and
tax/Net interest charges
Earnings per
share/Dividend per
share

Current assets/Current
liabilities
Current assets –
Inventories/Current
liabilities
(Inventories/Cost of
sales)* 365
(Receivables/credit

23.5%

20.3%

21.6%

79.0%

79.8%

77.5%

76.3%

74.3%

28.9%

32.5%

31.6%

26.9%

28.3%

46.3%

48.3%

45.0%

42.5%

43.4%

46.0%

67.4%

60.1%

65.8%

87.5%

19.4%

27.0%

24.2%

20.3%

21.9%

38.5%

58.9%

56.5%

41.9%

46.5%

2.4

2.5

2.5

3.2

4.0

0.91
1.26

1.14
1.50

1.04
1.25

1.04
1.28

1.06
1.43

14.75

12.53

11.53

11.73

12.49

32%

33%

34%

31%

19.0%

21.5%

22.6%

21.9%

0.171

0.190

0.207

0.606

0.800

67.611

93.924

124.14
3

32.665

29.91
5

278.816

85.889

76.937

72.712

87.06
9

0.175
0.009

Debt/equity

24.1%

18.8%

sales/total assets
Sales/non current assets
(Net credit)
Sales/Receivables

21.8%

33%

ROE/ROA

Debt/EBITDA
Interest/EBITDA
Short-term liquidity risk
Analysis
Current ratio

2007

0.141
0.007

0.179
0.006

0.439
0.019

0.454
0.022

0.69

0.54

0.34

0.43

0.59

0.68

0.21

0.20

0.22

0.21

408.71

236.98

110.86

134.10

221.1
0

Derived from DiGi Berhad Annual Reports 2006-2010

P a g e | 29

Financial Ratios

Description
2006

Credit obtained

sales)*365
(Trade payables/cost of
sales)*365

2007

Year
2008

2009

2010

586.81

484.57

499.84

445.46

477.8
6

0.359

1.164

1.316

1.376

1.148

0.295

-0.111

-0.190

-0.247

-0.130

2.373

2.494

2.481

3.242

3.989

0.723097082

0.7582
3903

0.8325
8897

0.81529
7128

0.740
9233

21.8%

24.1%

23.5%

20.3%

21.6%

0.91

1.14
2.4577
7155
67.35
%

1.04
2.4541
0116
60.13
%

1.04
3.11044
5964

1.06
3.814
458
87.48
%

2.1

2.44

1.96

1.73

19.04
%
20.76
%
19%
33.74
%

10.08
%
24.59
%
21%

1.68%

10.69
%

7.28%

7.01%

23%

22%

-3.71%

8.76%

250.5
6%

4.17%

-6.75%

-5.50%

2.10%

1.02%

-2.90%

-1.62%

56
92
59

54
89
59

49
84
55

Strategic Ratios
Dividend payout ratios
Sustainable growth
Financial leverage
coefficient

Dividend / Earnings
attributable to
shareholders
ROE x (1 – Dividend
payout ratio)
ROE/ROA

Operational Gearing
ROE decomposition

Asset turnover

Net profit for the
period/Sales
sales/total assets

Financial leverage

total Assets/equity

Net Profit margin

ROE

2.326035536
45.97%

Net assets per share
(RM)
General Ratios

2.34

Revenue growth rate

28.35%

Traffic charges growth
rate
Traffic charges / revenue

19%

Cost of material growth
rate
EBITDA margin
growth rate
Gross operating
margin growth
ARPU

Prepaid
Postpaid
Blended

50
96
54

65.76%

2.60%
46
83
52

P a g e | 30

4.2

Financial Figures – XL Axiata29
Financial Ratios

Description
2006

Net Profit margin
Gross operating
margin
Net operating
margin
Return on equity
(ROE)
Return on assets
(ROA)
Return on capital
employed (ROCE)
Financial leverage
coefficient
Total asset turnover
Long-term asset
turnover
Credit given
Credit obtained

Interest cover
Dividend cover

Acid test (or quick
ratio)
Credit given
Credit obtained

29

2009

2010

10.1%

3.0%

-0.1%

12.3%

16.4%

72.4%

77.2%

80.3%

84.1%

85.9%

15.9%

21.0%

14.4%

17.8%

29.3%

Net profit after tax/equity

15.23%

5.62%

-0.35%

19.41%

24.68%

8.0%

4.8%

3.7%

10.6%

13.5%

9.8%

7.6%

4.8%

13.6%

16.2%

1.9

1.2

-0.1

1.8

1.8

sales/total assets

0.51

0.44

0.42

0.51

0.65

Sales/non current assets

1.07

1.14

0.66

1.10

1.61

13.14

14.21

28.39

8.85

9.55

226.09

259.90

195.25

102.16

74.15

18.97%

19.15%

19.04%

14.80%

13.20%

1.72

2.16

4.35

1.53

0.87

2.82

2.74

1.60

2.04

6.62

9.71

1.77

-

2.87
0.14

2.75
0.18

3.65
0.21

2.17
0.19

1.10
0.08

0.51

0.24

0.60

0.33

0.49

0.51

0.24

0.60

0.33

0.47

35.43

58.91

146.00

55.21

50.27

226.09

259.90

195.25

102.16

74.15

Net profit before
interest/Total assets
on LT-debt/Equity + LTdebt
ROE/ROA

(account receivable/total
credit sales)*365
(trade payable/cost of
sales)*365

Debt/equity
Earnings per
share/Dividend per share

Debt/EBITA
Interest/EBITA
Analysis
Current ratio

Year
2008

Sales less Cost of
sales/sales
and tax/sales

Traffic charges /
revenue

Financial Strength
Analysis
Analysis
Gearing
(Debt/equity ratio)

2007

liabilities
Current assets –
Inventories/Current
liabilities
(Receivables/credit
sales)*365
sales)*365

-

3.18

Derived from XL Axiata Financial Statements (2006-2010)

P a g e | 31

Financial Ratios

Description

Year
2008

2006
Strategic Ratios
Dividend payout
ratios
Sustainable growth
Operating Gearing

Dividend / Earnings
attributable to shareholders
Sustainable growth = ROE
x (1 – Dividend payout
ratio)
–LT assets /Total assets

2007

2009

2010

0.10276
07

0.564940
24

0

0

0.3152
89

13.7%

2.4%

-0.3%

19.4%

16.9%

0.90630
69

0.910643
05

0.8713
64

0.9266983
2

0.9182
42

10.1%

3.0%

-0.1%

12.3%

16.4%

0.51
2.95188
04
15.23%

0.44
4.210750
28
5.62%

0.42
6.7110
03
-0.35%

0.51
3.1103033
06
19.41%

0.65
2.3261
63
24.68%

29.37%

45.32%

14.18%

71.21%

-0.40%

40.56%

27.07%
109.58
%

6.65%

4.02%

4.75%

2.12%

37.43%

40.99%

42.85%

36.33%

ROE
Decomposition

Asset turnover

Net profit for the
period/Sales
sales/total assets

Financial leverage

total Assets/equity

Net Profit margin

ROE
General Ratios
Revenue growth rate
EBITDA growth rate
Gross operating
margin growth
OPEX(excluding
COGS)/revenue

34.38%

P a g e | 32

4.3

Financial Figures – M130

Financial Ratios

Description
2006

Net Profit margin
Gross operating margin
Net operating margin
Return on equity (ROE)
Return on assets (ROA)

Sales less Cost of sales/sales
Net profit before interest and
tax/sales
Net profit after tax/equity
Net profit before interest/Total
assets
Net profit before interest on LTdebt/Equity + LT-debt

Return on capital
employed (ROCE)
Financial leverage
ROE/ROA
coefficient
Total Asset Turnover
Sales/Total Assets
Long-term Asset
Sales/Non-current Assets
Turnover
Inventory Turnover
Cost of sales/inventory
Receivables Turnover
(Net credit) Sales/Receivables
traffic charges/revenue
COGS/revenue
OPEX (excluding traffic charges)/revenue
Financial Strength Analysis
Analysis
Gearing (Debt/equity
Debt/equity
ratio)
Interest Cover
Dividend per Share
Earnings per share/Dividend
Dividend Cover
per share
1.1 Gearing (Debt/EBIDTA)
Analysis
Current ratio
liabilities
Current assets –
Acid test (or quick ratio)
Inventories/Current liabilities
Days inventory
(Inventories/Cost of sales)* 365
outstanding
Credit given
(Receivables/credit sales)*365
Credit obtained
sales)*365
Strategic Ratios
Dividend / Earnings
Dividend payout ratios
attributable to shareholders
ROE x (1 – Dividend payout
Sustainable growth
ratio)
Total Non-Current Assets /
Operating Gearing
Total Assets

30

2007

21.3%
65.0%

21.4%
63.1%

28.4%

Year
2008

2009

2010

18.7%
62.4%

19.2%
57.8%

16.0%
49.8%

25.4%

24.1%

23.2%

20.0%

43.1%

85.1%

67.2%

58.7%

51.9%

16.6%

21.4%

19.6%

18.7%

17.4%

40.4%

35.9%

30.1%

56.2%

29.5%

2.6

4.0

3.4

3.1

3.0

0.73

0.95

1.00

0.93

1.05

0.99

1.12

1.16

1.12

1.40

48.64
9.43
-17.3%
-0.35
-55.1%

35.41
9.94
-20.3%

35.36
11.56
-21.6%

13.00
8.95
-24.2%

21.01
5.49
-19.9%

-54.6%

-54.5%

-52.8%

-60.3%

0.65

1.41

1.12

1.05

1.04

21.37

21.53

25.42

28.10

33.59

0.261

0.108

0.145

0.134

0.134

63.67

171.00

115.88

125.53

130.28

0.75

0.89

0.79

0.87

1.01

0.51

0.44

0.48

0.28

0.78

0.50

0.41

0.44

0.23

0.70

-3.63

-5.07

-5.10

-15.39

-10.88

38.70

36.73

31.57

40.76

66.44

-131.13

-120.02

-93.73

-92.82

-73.62

1.57

0.56

0.86

0.80

0.77

-0.25

0.37

0.09

0.12

0.12

0.74

0.85

0.86

0.83

0.75

Derived from M1 Financial Statements (2006-2010)

P a g e | 33

Financial Ratios

Description
2006

ROE Decomposition
Financial Leverage
Net Profit margin
Debt to Assets
2.1 ROE

Total Assets / Total Equity
LT Debt / Total Assets
Net Profit Margin x Total Asset
Turnover x Financial Leverage

2007

2.76
21.3%
0.00

4.19
21.4%
0.30

43.09%

85.09%

Year
2008

2009

2010

3.60
18.7%
0.31

3.27
19.2%
0.00

3.09
16.0%
0.27

67.24%

58.69%

51.85%

P a g e | 34

4.4

References

Axiata Group Berhad (2010), 3rd Quarter 2010 Analyst and Investor Briefing, 24 th November 2010,
Axiata Group Berhad
Ayvazian. B, (March 2011), Heavy Reading, LTE Operator Business Case and Adoption Forecast, pp.
3-5.
Central Intelligence Agency, World Factbook, available at:
https://www.cia.gov/library/publications/the-world-factbook/index.html (accessed on 9th
November 2011)
DiGi.com Bhd. 2011, Annual Report 2005 – 2010 [online]. Available at
DiGi.com Bhd. 2011, Quarterly Financial Report Q1 2006 – Q4 2010 [online]. Available at
DiGi.com Bhd. 2011, Quarterly Analyst Breifing Q1 2006 – Q4 2010 [online]. Available at
Financial Daily, (2010), DiGi Prepaid Revenue gains traction, available at:
http://www.theedgemalaysia.com/in-the-financial-daily/165458-digi-prepaid-revenue-gainstraction.html (accessed on 7th November 2011)
Fong Min Hun, The Edge (2010), Spectrum Refarming could see Telcos Capex Rise, available at:
http://www.theedgemalaysia.com/features/168450-corporate-spectrum-refarming-could-see-telcoscapex-rise.html (accessed 7th November 2011)
Hendrik Clausen (2011), Analyst Briefing, 22 September 2011, DiGi Bhd.
Insider Asia, 2011, Steady Gains seen for DiGi, available at: http://www.theedgemalaysia.com/inthe-financial-daily/190317-steady-gains-seen-for-digi.html (accessed on 7th November 2011)
Investopedia, Altman Z-scores, available at:
http://www.investopedia.com/terms/a/altman.asp#axzz1eKZSDomX (accessed on14th November
2011)
Kelvin Goh (2011), “Telecommunication, Muffled by regulation and competition”, CIMB Research
MCMC (2007), Trends and Markets in Malaysian Mobile Services, volume 5, Malaysian
Communications and Multimedia Commission

P a g e | 35

MIDF Research, 2009, Equity Beat (DiGi.com Bhd), available at:
http://www.midf.com.my/project/midf/media/2009/05/04/094112-183.pdf (7th November 2011)
MobileOne Ltd, (2011) Investor Presentation Jan 2011, available at:
http://m1.com.sg/M1/CMA/About_Us/Corporate_Information/IR/PDF/Investor%20Presentation
%2019%20Jan%202011.pdf (accessed on 7th November 2011)
MobileOne Ltd. (2011), Annual Report 2006 – 2010 [online]. Available at
http://www.m1.com.sg/M1/site/M1Corp/menuitem.faca305fb9985217f15a947b3f2000a0/?vgnextoi
d=ad241b7faba72010VgnVCM100000275a160aRCRD&vgnextfmt=pdate:1111202212: (Accessed 15
November 2011)
PT XL Axiata Tbk. 2011, Annual Report 2006 – 2010 [online]. Available at
http://www.xl.co.id/investor-relation/language/en-GB/CompanyReports/Annual (Accessed 15
November 2011)
PT XL Axiata Tbk. 2011, Quarterly Report Q1 2006 – Q4 2010 [online]. Available at
http://www.xl.co.id/investor-relation/language/en-GB/CompanyReports/Quarterly (Accessed 15
November 2011)
Sidhu B.K. (11 Jun 2010). Celcom and DiGi to collaborate, The Star[Online]. Available at:
http://biz.thestar.com.my/news/story.asp?file=/2010/6/11/business/6448138&sec=business
[accessed on 22 November 2011]
Surin Murugiah, The Edge (2010), Spectrum Refarming in the Works, available at
http://www.theedgemalaysia.com/in-the-financial-daily/166717-spectrum-refarming-in-theworks.html (accessed on 7th November 2011)
Telenor, 2011, DiGi Business Description, available at: http://www.telenor.com/en/investorrelations/company-facts/business-description/DiGi (accessed on 7th November 2011)
Websites:
DiGi Berhad, www.digi.com.my
XL Axiata, www.xl.co.id
MobileOne, www.m1.com.sg

P a g e | 36

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