1.

0 Historical Data Analysis

In this session, we will analyze DiGi‟s financial historical data from 2004 to 2008. All
financial data are extracted from DiGi‟s financial year report in those respective years
(DIGI: Appendix 6.0-8.0).

FORMULA
Liquidity Measures 2004 2005 2006 2007 2008
Short Term Solvency
Current Ratio Current Assets /Current liabilities 0.73 1.08 0.69 0.54 0.34
Quick Ratio Current Assests -Inventory /Current liabilities 0.72 1.07 0.68 0.54 0.34
Cash Ratio Cash /Current liabilities 0.56 0.91 0.53 0.33 0.15

Short term solvency provides information about a firm‟s liquidity. According to

DiGi‟s current ratio from 2004 – 2008, we notice that DiGi only achieved positive net
working capital in year 2005. Most of the time, DiGi operated under negative net
working capital. It shows that DiGi did not have sufficient cash convertible assets to
cover its liabilities in short term. This could be a real concern to DiGi‟s supplier as
the company did not have sufficient liquidity to pay off the short term debt. We also
noticed that quick ratio was similar to current ratio. This is because DiGi always has
low inventory level. In spite of negative net working capital and low inventory level,
we see this as the nature of telecommunication business rather than unhealthy
company performance. Likewise, DiGi‟s biggest competitor Maxis also experience
negative net working capital in its 2009 Q3 performance (Appendix 1.0). DiGi‟s cash
ratio was rather low compared to its current liabilities obligation. Last year, DiGi‟s
cash in hand was only sufficient to cover 0.15 times of its current liabilities.

Financial Leverage 2004 2005 2006 2007 2008

Long Term Solvency
Total Assests - Total Equity /Total
Total Debt Ratio Assets 0.50 0.47 0.40 0.59 0.59
Debt-equity ratio Total Debt/Total Equity 1.00 0.89 0.67 1.44 1.44
Equity multiplier Total assests /Total Equity 2.01 1.88 1.68 2.46 2.45

Long term solvency ratios are intended to address the company‟s long-run ability to
meet its obligations or, more generally, its financial leverage. In 2004, DiGi‟s total
debt ratio was still 0.50. It means DiGi has RM 0.50 in debt for every RM 1 in assets.
Therefore, there was RM 0.50 in equity for every RM 0.50 in debt. However, the total
debt ratio increased to 0.59 in 2008; hence debt-equity ratio became 1.44 from 1.00.
This shows that capital structure of DiGi has changed significantly. The drastic
change between 2006 and 2007 where we see the debt-equity ratio was increased
from 0.67 to 1.44 was due to the capital repayment done by DiGi in 2007.

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Turnover Measures 2004 2005 2006 2007 2008

Inventory Turnover Cost of Goods Sold /Inventory 38.16 78.78 94.83 102.66 63.96
Days' Sales in Inventory 365 days /Inventory turnover 9.56 4.63 3.85 3.56 5.71
Receivables Turnover Sales /Accounts Receivables 12.62 13.45 14.55 12.41 11.44
Days' Sales in
receivables 365 days /Receivables 28.92 27.14 25.08 29.42 31.90

Total Asset Turnover turnover Sales /Total Assests 0.81 1.02 1.24 1.48 1.24

In this session, we shall see how efficient DiGi was in dealing with its assets.
Impressively, DiGi‟s inventory turnover was very quick in last 5 years. From 2005 to
2008, DiGi‟s inventory was sold in less than 1 week (Days‟ Sales In Inventory).
Likewise, DiGi needed approximate 1 month to collect outstanding credit accounts
(Days‟ Sales in receivables). DiGi‟s total asset turnover was improving from 0.81 in
2004 to 1.24 in 2008. It means that DiGi was making RM 1.24 sales for every RM 1
in asset in 2008 almost 50% up from 4 years ago. We may conclude that DiGi was
improving in asset management.

Profitability Measures 2004 2005 2006 2007 2008

Profit Margin Net Income /Sales 14.21% 16.33% 22.06% 24.36% 23.69%
Return on Assets ( ROA) Net Income / Total assets 8.90% 11.13% 19.77% 27.40% 24.50%
Return on Equity (ROE) Net Income /Total Equity 17.86% 20.95% 33.19% 67.35% 60.13%

Based on the profit margin of DiGi in last 5 years, we can see that the profit margin
was improved from 14.21% in 2004 to 23.69% in 2008. However, we do not expect
this margin continues to rise due to price pressure and market maturity. And the latest
DiGi 2009 Q3 report only made the forecast more solid by showing deteriorating
profit margin at 19.70% (DIGI : Appexdix 2.0).

1.1 Financial Highlight Summary

Year Ended Year Ended Year Ended Year Ended Year Ended
31 Dec 2004 31 Dec 2005 31 Dec 2006 31 Dec 2007 31 Dec 2008

RM ‘000 RM ‘000 RM ‘000 RM ‘000 RM ‘000

Revenue 2,233,703 2,884,324 3,652,536 4,362,635 4,814,475

Profit before taxation 446,843 661,550 1,087,139 1,445,314 1,546,896

Net profit 317,355 470,955 805,653 1,062,595 1,140,715

Total assets 3,566,347 4,232,319 4,076,147 3,877,491 4,655,852

Shareholder‟s fund 1,777,193 2,248.148 1,752,401 1,577,645 1,897,172

Long term liabilities 655,546 681,548 685,105 573,791 491,557

Net profit as % of revenue 14.2% 16.3% 22.1% 24.4% 23.7%

EBITDA 43.83% 43.66% 46.40% 48.36% 45.10%

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EPS (sen) 42.3 62.8 107.4 141.7 148.5

Net tangible assets per 2.30 3.00 2.34 2.10 2.44

share (sen)

According to DiGi‟s financial summary from 2004 to 2008, we are impressed by the
solid growth achieved by the company every year. The revenue growth maintained
double digits except 2008 down to 9% compared to its previous year. EBITDA was
maintained at around 45% every year with peak recorded at 2007 where EBITDA rose
to 48.36%. At the same year, net profit also recorded its best margin at 24.4%.
Likewise, ROA & ROE of 2007 were also the highest in recent years. Therefore, we
may conclude that DiGi was growing rapidly from 2004 to 2007 where its best
performance was recorded in that year but slow down the pace in 2008. We will
explain the reason of the slow down performance in next chart.

1.2 DiGi’s key areas performance

The chart above shows the key areas performance of DiGi from 2004 to 2008. We are
comparing DiGi‟s EBITDA, net income growth and relate them to revenue and
operating cost growth. We notice that DiGi‟s revenue growth was above its cost
before 2008 therefore DiGi achieved year-to-year positive growth in EBITDA and net
income. However, in 2008 the cost was growing faster than revenue resulted EBITDA
and net income fell from its peak at 2007.

1.3 DiGi’s Operating Cash Flow Summary

Although DiGi‟s financial highlight summary shows it‟s profitable, but it‟s still too
early to conclude the company is healthy. In order for a company to be sustainable, its
business not only needs to make profit but also needs to generate enough cash flow to
support daily business operating expenses. Now let‟s look at DiGi‟s operating cash
flow from 2004 to 2008 as below:

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Year Ended Year Ended Year Ended Year Ended Year Ended
31 Dec 2004 31 Dec 2005 31 Dec 2006 31 Dec 2007 31 Dec 2008

RM ‘000 RM ‘000 RM ‘000 RM ‘000 RM ‘000

(1) Operating 509,427 675,831 1,066,899 1,428,760 1,535,137
profit/(loss) or
EBIT
(2) Depreciation 465,553 579,449 584,581 598,566 572,940
(3) Tax expense 129,488 190,595 281,486 382,719 406,181
(4) OCF 845,492 1,064,685 1,369,994 1,644,607 1,701,896
(1) + (2) – (3)

As shown by the chart diagram above, DiGi‟s operating cash flow was improving
since 2004 from RM 845 million to RM 1.7 billion in 2008. Therefore we could
conclude that DiGi is a profitable and healthy company.

2.0 DiGi’s 3G project: Capital Budgeting and

Discounted Cash Flow evaluation
On 14 November 2007, a strategic alliance was announced between DiGi and Time
dotcom Berhad to have 3G license transferred from Time dotCom to DiGi; meanwhile
with 27.5 million of DiGi shares acquired by Time dotcom. In order to achieve the 3G
license, DiGi has initial investment of 27.5 million of shares which equivalent to RM 695
billion (RM25.20 per share at that point of transaction happened). After 3G spectrum
transaction was completed on May 7, 2008, DiGi announced that additional CAPEX of
RM 600 million to RM 800 million in the first 3 years (of which RM 150 million to RM
200 million is expected in 2008) will be invested in 3G infrastructure.
In this session, we will evaluate DiGi‟s 3G project via capital budgeting as well as
discounted cash flow methods to justify whether the said project shall be taken or not.
In this evaluation, straight line depreciation will be used. Government tax rate is 26%
and discount rate of cash flow is 5.8%. We proposed RM 10 million of initial working
capital and 8% of yearly revenue will be used as net working capital in the subsequent

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years as project expansion occurs. However, all working capital is assumed to be

recovered at the end. The evaluation period is 10 years since the license will be
expired in early 2018.

The capital budgeting analysis of the project is as below:

INITIAL INVESTMENT RM’000

Initial Investment= $695,000

Opportunity cost (if any)= $0

Lifetime of the investment 10

Salvage Value at end of project= $0

Deprec. method Straight line

Tax rate on net income 26%

Discount Rate 5.8%

WORKING CAPITAL RM’000

Initial Investment in Work.
Cap= $10,000
Working Capital as % of Rev= 8%
Salvageable fraction at end= 100%

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000
(1) Revenue 0 38,800 168,480 324,000 518,400 777,600
(2) Cost 200,000 300,000 300,000 100,000 100,000 300,000
(3) EBITDA (200,000) (261,200) (131,520) 224,000 418,400 477,600
[(1) – (2)]
(4) Depreciation 69,500 69,500 69,500 69,500 69,500 69,500
(5) EBIT (269,500) (330,700) (201,020) 154,500 348,900 408,100
[(3) – (4)]
(6) Tax @ 26% (70,070) (85,982) (52,625) 40,170 90,714 106,106
(7) EBIT(1-t) (199,430) (244,718) (148,755) 114,330 258,186 301,994
[(5) – (6)]
(8) + Depreciation 69,500 69,500 69,500 69,500 69,500 69,500
(9) - ∂ Work. Cap (10,000) (6,896) 20,374 12,442 15,552 20,736
(10) Total CF (705,000) (119,930) (168,322) (99,629) 171,388 312,134 350,758
[(7) + (8) + (9)]
(11) Discount Factor 1 1.058 1.119364 1.184287 1.25297 1.32564 1.40253
(12) Discounted CF (705,000) (113,355) (150,373) (84,126) 136,785 235,458 250,088

Year 7 Year 8 Year 9 Year 10

RM’000 RM’000 RM’000 RM
’000
(1) Revenue 1,036,800 1,296,000 1,555,200 1,814,400
(2) Cost 300,00 100,000 50,000 50,000
(3) EBITDA 736,800 1,196,000 1,505,200 1,764,400
[(1) – (2)]
(4) Depreciation 69,500 69,500 69,500 69,500
(5) EBIT 667,300 1,126,500 1,435,700 1,694,900
[(3) – (4)]
(6) Tax @ 26% 173,498 292,890 373,282 1,694,900
(7) EBIT(1-t) 493,802 833,610 1,062,418 1,254,226
[(5) – (6)]
(8) + Depreciation 69,500 69,500 69,500 69,500
(9) - ∂ Work. Cap 20,736 20,736 20,736 20,736
(10) Total CF 542,566 882,374 1,111,182 1,302,990

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[(7) + (8) + (9)]

(11) Discount Factor 1.483883 1.569948 1.661005 1.757343
(12) Discounted CF 365,639 562,040 668,982 824,052

NPV = RM 1,990,190,000
IRR = 22.12 %

As we may see the project cash flow will be only positive after 3 years due to low
subscribers‟ base and heavily network expansions.

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
BB Subs 0 30000 130000 250000 400000 600000 800000 1000000 1200000 1400000
BB ARPU 0 1296 1296 1296 1296 1296 1296 1296 1296 1296
Revenue 0 38800 168,480 324,000 518,400 777,600 1,036,800 1,296,000 1,555,200 1,814,400
(RM)
BB = Broadband
ARPU: Average Revenue Per User

Project RM „000
Year 0 (705,000)
Year 1 (113,355)
Year 2 (150,373)
Year 3 (84,126)
Year 4 136,785
Year 5 235,458
Year 6 250,088
Year 7 365,639
Total Cash Flow (64,884)
Year 8 562,040
Total Cash flow 497,156

Pay Back period = 7 years & 6 weeks

Though the payback period of the project is very long, but considering the net present
value of the project is approx RM 2 billion therefore we still consider the 3G project
is worthwhile for the investment. Similar conclusion is reached if we are using the
IRR as the project investment measure. IRR of this project is valued at 22.12% which
is higher than discount rate of 5.8 therefore the project should be undertaken.

3.0 Strengths and Weaknesses

One of the key strength of DiGi is the company capability to sustain growth and profit
by generating unbelievable double digit growth from 2004 to 2007. EBITDA of the
company is maintained at 45% every year. Company operating cash flow is very
healthy as well. Such an impressive financial achievement must thank to the tireless
management team for their continuous innovative approach to their products. As we
all might know, DiGi has been one of the most innovative and creative company in
the country. The famous „Yellow Man‟ is well known in the community. Besides that,
DiGi is actively participating in CSR (corporate social responsibility) activities. As a
result of that, DiGi became the first corporate organization to be awarded the
Anugerah Pendukung Seni by the Ministry of Cultures, Arts and Heritage. All these
efforts actually turned into better corporate image which increases the company
intangible assets. Therefore, we see their subscriber base grew from around 3 million
subscribers in 2004 to 7 million subscribers at the end of 2008.

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One of the main reason of DiGi‟s share becomes the favorite of investors is their high
dividend payout policy. DiGi even paid more dividend than EPS in year 2007 and
2008 due to excess cash in hand. This indicates that DiGi has turned into „cash cow‟
position since 2007. Due to high market penetration and less expansion is required,
DiGi announced to increase their payout ratio to at least 85% of their net profit since
Q3 2009.

However, one of the key weaknesses of DiGi is their poor financial short term
solvency. In spite of strong cash flow of the company, DiGi‟s current ratio, quick
ratio and cash ratio have been deteriorating in recent year. Besides that, price pressure
and high market penetration may erode future revenue growth. Though in some
developed nations the market penetration can go up to 140%, but the room for growth
is very limited due to highly competitive market and lower profit margin.

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Another concern we would like to raise here is DiGi‟s operating cost grows faster
than revenue in recent years. As future revenue growth is limited, higher cost margin
will further dampen the net profit of the company.

4.0 Recommendations
As mobile voice market penetration has exceeded 100% (116% in Q2 2009), business
focus and strategy of DiGi shall shifted from traditional voice traffic to data traffic.
By looking at the low broadband market penetration at only 21.10% last year,
broadband business is certainly the next drive of growth in the telecommunication
industry (Appendix 3-5). Therefore, DiGi must grasp the next wave of change in
order to sustain the growth in future.

Cost efficiency campaign must be launched to counter fast growing operating cost.
DiGi may re-structure its business units into smaller size and consolidate redundant
functional groups into fewer groups to reduce cost. In short run, marketing expenses,
O&M expenses, CSR expenses should be revised to control variable cost. In long run,
low productivity plants should be considered to shut down in order to control fix cost.
As DiGI‟s biggest customer segment is foreign workers, therefore the company
performance is more vulnerable to global economy down turn. It‟s time for DiGi to
redefine their customer segments and shift the focus from heavily rely on single
segment to multiple market segments.