This article first appeared in The Edge Malaysia Weekly, on January 18 - 24, 2016

JUST a year ago, DiGi.Com Bhd was one of those stocks that investors wished they had bought on hindsight for its exceptional returns since 2007 without relying on borrowings.

Now, the stock is about 17% below its all-time high recorded in late-February 2015 and twice as many analysts are calling a “sell” on the stock as the six recommending a “buy”. Twelve others are “neutral”, according to Bloomberg data. From early 2015, DiGi has declined nearly 16% — twice as much as the bellwether FBM KLCI. By comparison, its larger rival Maxis Bhd has lost less than 4% of its value.

So, what gives? More importantly, is it time to reconsider one’s shopping list?

Going by the lowest FY2016 dividend per share (DPS) forecast of 22 sen apiece, yield was 4.26% at DiGi’s RM5.16 close on Jan 14. The implied yield would be even higher at 4.65% if the DPS assumption was 24 sen — which was the projection for FY2015 and is below the FY2016 consensus forecast of 24.7 sen and the 26 sen paid in FY2014.

By comparison, yield compressed to below 3% at Telekom Malaysia Bhd, whose much sought-after minimum RM700 million annual dividend promise works out to 18.63 sen at its current share base and 2.85% yield at its RM6.55 close last Thursday. Yields are 3.4% and 3.7% on consensus DPS of 22 sen for FY2015 and 24 sen for FY2016.

If one were to assume a 3.5% yield on the lowest dividend forecast of 22 sen, DiGi’s shares should fetch 22% more at RM6.29 apiece. The upside is over one-third if one were to assume the richer consensus payout of 24.7 sen for FY2016.

That DiGi’s 2015 earnings are likely to come in lower year on year and remain lacklustre in 2016 is a big concern, says a seasoned analyst. “The ringgit’s depreciation has meant more expensive international traffic charges for DiGi and [2015] Ebitda will likely be lower y-o-y.”

Indeed, DiGi’s Ebitda (earnings before interest, tax, depreciation and amortisation) for the first nine months of FY2015 only made up 72% of what it made in the whole of 2014 while 9MFY2015 net profit fell 8.9% y-o-y to RM1.34 billion.

DiGi paid 5.1 sen DPS in 3Q2015, bringing its total dividend for the three quarters to 17.1 sen or RM1.33 billion. The full-year 2015 dividend would be 22.2 sen if DiGi pays 5.1 sen DPS in 4Q2015.

Even if one assumed 20 sen DPS for FY2016 — the lowest payout per share since 2012 — DiGi should fetch 10.7% more at RM5.71 for a 3.5% yield.

To be sure, there are valid operational concerns.

A quick look at the 3Q2015 numbers for DiGi, Celcom and Maxis shows DiGi lagging behind both Maxis and Celcom in terms of y-o-y financial performance. Maxis was in the lead in terms of revenue, Ebitda and Ebitda margins as well as subscriber base.

Some 85% of DiGi’s 11.7 million subscribers are in the prepaid segment, which is perceived to be more price-sensitive than the postpaid segment. This is larger than the 75.8% at Maxis and 77.6% at Celcom. This is why any movement in the prepaid segment, which could be hit by weak consumer sentiment, is seen to have a bigger impact on DiGi.

It is worth noting that with 9.93 million prepaid users, Maxis has slightly more of them than DiGi’s 9.9 million and Celcom’s 9.71 million as at Sept 30, 2015. A Maxis user also pays an average of RM49 a month — higher than RM45 a month at DiGi and Celcom.

The trio account for some 85% of Malaysia’s total mobile subscriber base.

Yet, based on 3Q2015 numbers, DiGi has more flexibility in balance sheet capacity. Its net debt to Ebitda is only 0.32 times currently, even with lower Ebitda assumptions this year, back-of-the-envelope calculations show.

Maxis’ net debt to Ebitda multiple is about 1.8 times, Telekom Malaysia’s (TM) is 0.8 times while Celcom’s parent Axiata Group Bhd’s is between 1.5 and 2 times following its Nepalese acquisition, which it said would add to its dividend paying capacity.

If nothing else, these figures give DiGi the option to maintain dividends even as it works out a strategy to win more earnings and boost margins.

At the time of writing, Bloomberg shows target prices for DiGi ranging from JP Morgan’s RM4.20 to BIMB Securities’ RM6.80 and averaging at RM5.33 apiece.

If DiGi can pay the consensus DPS of 24.7 sen for 2016, its shares should fetch RM7.06, assuming a 3.5% yield. If DPS is only 20 sen for 2016, DiGi would fetch RM6.67, assuming a 3% yield.

There are those who reckon that Norway’s Telenor ASA — which owns 49% of DiGi and previously considered adopting a business trust structure for the latter to release more cash — may have less of an incentive for a large payout when the ringgit is weak.

There is also concern that DiGi, which paid more than its rivals for its 3G spectrum, may face similar circumstances should regulators call for a spectrum re-farming in the coming three to five years. In the meantime, investors would need to “currency-adjust” their expected returns based on their assumption of the ringgit.

Still, it is worth noting that the Employees Provident Fund and its portfolio managers were net buyers of DiGi, Maxis, TM and Axiata shares last year.

Between end-2015 and now, stock exchange filings show that the EPF continued to buy DiGi and Axiata but took profit in Maxis on Jan 12 and in TM on Jan 11. The EPF still held 16.23% of TM (14.73% at end-2014), 14.55% of Axiata (13.54% at end-2014), 14.13% of DiGi (13.27% at end-2014) and 7.45% of Maxis (6.46% at end-2014) at the time of writing.

The holdings of these four stocks alone could potentially rake in RM720 million to RM880 million in dividends this year or about 13% of the RM5.6 billion to RM7 billion that DiGi, Maxis, Axiata and TM are projected to pay this year. That’s important, given that the EPF needed RM5.41 billion to pay every 1% of dividend in 2014, up from RM4.91 billion in 2013. This figure is likely to have grown for 2015 — not that different from the average investor who will be hard-pressed to make bigger returns from every ringgit.

From a yield perspective, DiGi seems a rational choice unless its operational numbers deteriorate significantly from current levels. DiGi, which has been paying quarterly dividends since 2010, is slated to announce its full-year earnings for 2015 on Feb 5.

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