EBITDA Multiples Analysis for Telco

All of us should know business challenges of all Telco in the world, so I won’t list them here (2 seconds Googling).

I was very curious about where will our local Telco (#DIGI#MAXIS, etc…) be heading to, from valuation perspective (#EBITDA Multiples – EV/EBITDA)?

Thus, to get the trend, I have spent 11-12 crazy working hours in the past 2 weeks to collect past 5 years historical EV/EBITDA of 107 Telco (> USD 1,000 mil market cap).

In the past five years, in average, EV/EBITDA was in the range from 5.3 to 9.1. Compare to our local telco (latest financial year),
1. MAXIS – 14.02
2. DIGI – 13.3
3. #AXIATA – 7.66
4. #TM – 7.03

There are only 23 companies (of course, including DIGI and MAXIS) having EV/EBITDA more than 10. The obvious trend is EBITDA Multiples of 16 companies (out of 23) are gradually declining.

On one hand, we may argue that MAXIS and DIGI deserve higher valuation because of high dividend payout. On the other hand, both are facing the same challenges like others, and we can see stagnant (perhaps declining) growth in their top-line and bottom-line. High dividend payout must be supported by top-line and bottom-line too.

I believe in long term (I don’t know how far away), EBITDA multiple of DIGI and MAXIS will be converging below 10.

For DIGI, if we use 5.3-9.1 as guidance, its fair value is 2.3-3.5. This is very different from my previous valuation.

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DIGI Updates – 24 Jul 2017

DIGI Analysis File – http://wp.me/a17Hxk-2IA

As a follow up to DIGI Updates – 21 Apr 2017, based on Q1 and Q2 FY17 results, I have updated financial modelling for DIGI by making couple of major adjustments, such as:

  1. Higher depreciation
  2. Higher capex
  3. Lower revenue projection 😦

After the adjustments, fair value of DIGI is around 4.6 which is overvalued (4.8 as of 24 Jul 2017). As of now, I won’t consider to accumulate DIGI, but to hold it for extremely high dividend yield as my average cost for DIGI is almost free.

DIGI Updates – 21 Apr 2017

DIGI Analysis File – https://doc.co/idLdDU

I think stiff competition between Malaysian Telcos will continue in the foreseeable future. I don’t expect significant growth in DIGI business (in matter of fact, this applies to other Telcos too). You can easily find challenges faced by Telco by Googling.

In my opinion, at 5.16, valuation of DIGI is fully valued where I believe its fair value range from 4.9 to 5.2. Its dividend yield is around 4% only.

As of now, I won’t consider to accumulate DIGI, but to hold it for extremely high dividend yield as my average cost for DIGI is almost free.

Join my FB group: https://www.facebook.com/groups/285121298359919 for more collaboration.

DIGI – Fundamental Analysis (13 Jul 2016)

Excel – Download the analysis file

Latest Financial Report – Q2 2016 Financial Report (11 Jul 2016) and Management Discussion And Analysis 2Q 2016

FY16 Q2 Results Highlight:

  • DIGI’s net profit for 2QFY16 fall 9.4% to RM420.61m, or 0.0541 eps (1QFY15: RM464.36m, 0.0597 eps), due to unrealised foreign exchange and derivatives losses of RM12.72 million. Its EBITDA fell 6.7% YoY to RM735m in 2QFY16, while its Ebitda margin slid 1.3 percentage points to 44%.
  • Revenue also came in 3.9% lower at RM1.66b, from RM1.72n in 2QFY15.
  • For 1HFY16, DIGI posted a 13.1% decline in net profit to RM819.65m or 0.1054 eps, from RM943.58m or 0.1214 eps in 1HFY15, due to aggressive high-speed data quota bundling and heavy discounts. Revenue stood at RM3.31b, down 5.7% from RM3.51b.
  • Its service revenue dropped 2% y-o-y to RM1.56b, even though its active Internet subscribers rose to eight million along an increase in smartphone penetration to 62%, while 4G LTE subscribers grew to 3.3m, from 1.3m a year ago.
  • Internet revenue made up a total of 36.1% of service revenue for 2QFY16, and continued to grow as smartphone adoption rose to 62% and active Internet subscribers up to 64.5% of the total subscriber base. ARPU was steady at RM42, backed by 12.3 million subscribers.
  • Despite being challenged by the industry’s aggressive Internet quotas and heavy discounts, DIGI’s postpaid ARPU strengthened to RM82 on a larger subscriber base, while prepaid ARPU dipped marginally to RM34, on the back of relatively stable prepaid subscribers.
  • Its 4G LTE and 4G LTE-A network footprint now stands at 76% and 34% of the population nationwide respectively

 

Going Forward:

  • Management has maintained an unchanged guidance for service revenue and EBITDA (similar to 2015 levels), but revised capex intensity guidance upwards to 13-14% of service revenue, from 11-12%. Nonetheless, management has guided that there is no change in plans for network roll-outs, where the capex intensity revision is due to costing estimations.
  • In my opinion, fair value of DIGI range from 5.1 to 5.3. Uncertainty risk of fair value is MEDIUM.
  • I will continue to hold this share, and accumulate it.

At the time of writing, I owned shares of DIGI.

DIGI – Fundamental Analysis (27 Apr 2016)

Excel – Download the analysis file

Latest Financial Report – Q1 2016 Financial Report (22 Apr 2016) and Management Discussion And Analysis 1Q 2016

FY16 Q1 Results Highlight:

  • DIGI reported a 16.7% decline in net profit to RM399mn for 1Q16, mainly due to lower device revenue, higher depreciation cost, net interest cost and effective tax rate.
  • Service revenue down slightly but device sales fell sharply. For 1Q16, service revenue dropped 1.8% YoY but device sales delivered a sharper decline of 54.3% YoY as sales volume for smartphones were weaker and DiGi focuses on offering more affordable devices and sim-only packages. Subscriber growth was impressive at 5.5% but blended ARPU dropped from RM46 in 1Q15 to RM42. Postpaid segment recorded a strong subscriber growth of 8.2% while prepaid ARPU reported a larger decline of 10.3% to RM35.
  • EBITDA margin remained stable at 43%. Traffic cost remained elevated, rose 17% YoY due to higher IDD traffic volumes and cost hike from weaker ringgit. Meanwhile, depreciation cost rose 11.6% YoY from continuous investment in stronger infrastructure capabilities. However, EBITDA margin remained stable at 43% due to lower operating cost while COGS was unchanged. Net profit was down 16.7% YoY mainly due to lower sales, higher depreciation and net interest cost. Additionally, effective tax rate increased from 23% to 25%.
  • DIGI reduced its 1Q16 capital spending by -11.4%yoy to RM171m mainly due to heavy capex deployed for 4G LTE network in 4Q15. As at 1Q16, the 4G LTE network has reach 73% population coverage nationwide, backed by 6,700km of fiber network.

Valuation:

In my opinion, fair value of DIGI range from 4.7 to 5.3. Uncertainty risk of fair value is from MEDIUM to HIGH.

DIGI-FY16Q1-Football-Field

Going Forward:

Digi possesses a strong management team. Based on the historical track record, the group has managed to compete with its peers despite its subservient position in the spectrum allocation domain. This is shown in its ability to move in-tandem with the demand of the market, especially the prepaid segment. Furthermore, latest earnings result has shown that there is encouraging growth in the post-paid segment which is usually dominated by its peers.

Digi’s attractive product offerings and active marketing campaigns has worked in favour of the group as seen in the growth of its subscriber base. However, higher subscriber acquisition cost and lower ARPU has impacted the profit margin. We already can see the intense competition landscape in the market. This would, in turn, lead to subdued earnings growth prospect.

The 2016 guidance remained intact as follows:

  • Service revenue – Sustain at 2015 level
  • EBITDA – Sustain at 2015 level
  • Capex – Sustain at 2015 level

I will continue to hold this share, and accumulate it.

At the time of writing, I owned shares of DIGI.

DIGI – Fundamental Analysis (19 Apr 2016)

Excel – Download the analysis file

Latest Financial Report – Q4 2015 Financial Report (5 Feb 2015) and Management Discussion And Analysis 4Q 2015

FY15 Q4 Results Highlight:

  • Digi made solid progress on its acquisition drive and attracted additional 450K subscribers in the final quarter to end the year with 12.1 million subscribers. At the same time, Digi pursued on aggressive 4G-LTE network expansion to more than 65% of the population nationwide. Meanwhile, service revenue registered positive sequential growth to RM1,587 million with total service revenue for the year at RM6,348 million. Underlying EBITDA and PAT margins, however, was impacted by seasonally higher smartphone demand in addition to effects from continued intense competition and weak MYR currency.
  • Digi reported 4Q15 earnings of RM382,4m, a decline of -31.7%yoy. This represents a decrease of -15.2%yoy which was mainly caused by higher progressive depreciation from network expansion, accelerated depreciation of RM26m relating to migration of data centre, and aggressive promotion campaign.
  • ROIC and CROIC were also decreased to 69.1% (FY14: 92.5%) and 53.9% (FY14: 88.3%) respectively. However, efficiency of DIGI in generating profits and cash flows is still the highest among the peers.
  • Despite aggressive promotion campaign, DIGI still able to maintain EBITDA margin at 43.1% (FY14: 45.1%).
  • Digi’s distributed approximately 100% of its 4Q15 reported earnings which amounted to 4.90sen per share. For FY15, the group has declared dividend amounted to 22sen per share. This is 4sen per share lower as compared to 26sen per share declared in FY14.
  • DIGI provided a full analysis of the Group’s prospects up to 31 December 2015 in the “Management Discussion & Analysis“.

Valuation:

In my opinion, fair value of DIGI range from 4.7 to 5.3. Uncertainty risk of fair value is from MEDIUM to HIGH.

DIGI-FY15Q4-Football-Field

Going Forward:

Digi possesses a strong management team. Based on the historical track record, the group has managed to compete with its peers despite its subservient position in the spectrum allocation domain. This is shown in its ability to move in-tandem with the demand of the market, especially the prepaid segment. Furthermore, latest earnings result has shown that there is encouraging growth in the post-paid segment which is usually dominated by its peers.

Digi’s attractive product offerings and active marketing campaigns has worked in favour of the group as seen in the growth of its subscriber base. However, higher subscriber acquisition cost and lower ARPU has impacted the profit margin. We already can see the intense competition landscape in the market. This would, in turn, lead to subdued earnings growth prospect.

The 2016 guidance remained intact as follows:

  • Service revenue – Sustain at 2015 level
  • EBITDA – Sustain at 2015 level
  • Capex – Sustain at 2015 level

I will continue to hold this share, and accumulate it.

At the time of writing, I owned shares of DIGI.

DIGI – Fundamental Analysis (27 Oct 2015)

Fundamental Analysis as of FY14 – http://www.slideshare.net/lcchong76/digi-fundamental-analysis-fy14

Excel – http://1drv.ms/1S8GZ8d

Latest Financial – Q3 2015 Financial Report (26 Oct 2015) http://www.bursamalaysia.com/market/listed-companies/company-announcements/4901553

Management Discussion And Analysis 3Q 2015 – http://disclosure.bursamalaysia.com/FileAccess/apbursaweb/download?id=188655&name=EA_FR_ATTACHMENTS

FY15 Q3 Results Highlight:

  • Digi reported 3Q15 earnings of RM396.6m, a decline of -18.5%yoy. Excluding forex impact of +RM37m, normalised PAT came in at RM433.6m. This represents a decrease of -10.9%yoy which was mainly caused by higher progressive depreciation from network expansion and accelerated depreciation of RM26m relating to migration of data centre.
  • Service revenue for current quarter (“3Q 2015”) remained resilient and fairly stable at RM1,584 million against preceding quarter (“2Q 2015”) of RM1,589 million amid intense price competition and weak consumer sentiment. Device and other revenue trended lower for the quarter and contributed to sequentially lower overall revenue of RM1,675 million (2Q 2015: RM1,723 million). As a flow through from margin compression from price competition, increased traffic and foreign exchange (“forex”) cost from unfavourable forex movement (3Q 2015: RM4.40 vs. 2Q 2015: RM3.77 against USD), EBITDA moderated to RM719 million (2Q 2015: RM788 million). Consequentially, profit before tax leveled to RM537 million (2Q 2015: RM626 million) after accounting for progressively higher depreciation from network expansion.
  • DIGI provided a full analysis of the Group’s prospects up to 31 December 2015 in the “Management Discussion & Analysis“.
  • 26 Oct 2015 – Digi mulling Voice-over-LTE (VoLTE) services in 2016
    • Digi would be the first mobile network operator (MNO) to rollout VoLTE in Malaysia
    • There is a possibility that users might need to pay more with VoLTE. This could help battle the decrease in average revenue per user (ARPU). Digi’s ARPU has been under pressure since 2013, decreasing to RM46 from RM48 in 2013.

Valuation:

  • 5-Y DCF:
    • Good Scenario (9.0% – 11.0%): From 6.27 to 6.74 (Uncertainty Risk: LOW to MEDIUM)
    • Base Scenario (6.0% – 8.0%): From 5.61 to 6.04 (Uncertainty Risk: MEDIUM)
    • Bad Scenario (3.0% – 5.0%): From 5.02 to 5.41 (Uncertainty Risk: HIGH to VERY HIGH)
    • Ugly Scenario (-1.0% – 1.0%): From 4.31 to 4.65 (Uncertainty Risk: VERY HIGH)
    • At current price (5.25), based on RDCF, assumption of FCFF growth rate in the next 5 years is 4.5%.
  • Absolute EY%:
    • Trailing:
      • FY14 (EPS: 0.261) – 6.209 (Uncertainty Risk: MEDIUM)
      • R4Q (EPS: 0.244) – 5.809 (Uncertainty Risk: MEDIUM)
    • Forward:
      • FY15 (EPS: 0.252 ± 5%) – From 5.694 to 6.294 (Uncertainty Risk: MEDIUM)
      • FY16 (EPS: 0.263 ± 5%) – From 5.936 to 6.561 (Uncertainty Risk: MEDIUM)
    • EPS applied to reach the current stock price (5.25): 0.221
  • Industrial Average EY%:
  • Trailing:
  • FY14 (EPS: 0.261) – 6.24 (Uncertainty Risk: MEDIUM)
  • R4Q (EPS: 0.244) – 5.84 (Uncertainty Risk: MEDIUM)
  • Forward:
    • FY15 (EPS: 0.252 ± 5%) – From 5.72 to 6.32 (Uncertainty Risk: MEDIUM)
    • FY16 (EPS: 0.263 ± 5%) – From 5.96 to 6.59 (Uncertainty Risk: MEDIUM)
  • In my opinion, fair value of DIGI range from 6.0 to 6.3.
  • image

    Going Forward:

    Digi possesses a strong management team. Based on the historical track record, the group has managed to compete with its peers despite its subservient position in the spectrum allocation domain. This is shown in its ability to move in-tandem with the demand of the market, especially the prepaid segment. Furthermore, latest earnings result has shown that there is encouraging growth in the post-paid segment which is usually dominated by its peers. On the other hand, aggressive price competition as well as pressure on consumer wallet has impacted the mobile network operators.

    The 2015 guidance remained intact as follows:

    • Low to mid single digit service revenue growth
    • Sustain EBITDA margin and Capex similar to 2014 level

    I will continue to hold this share, and accumulate it.

    At the time of writing, I owned shares of DIGI.