DiGi’s strong financials Let’s slip back to the year 2001. As we know, DiGi is a telecommunication company with mobile telephony as its core business. In December 1999, Telenor of Norway acquired a 30% stake in DiGi. Telenor subsequently increased its stake to 32.93% in May 2000 and ultimately raised it to 61% in 2001.
The strong commitment shown by Telenor has no doubt raised the profile of DiGi among the investment community. DiGi was also expected to benefit from the expertise of Telenor which is one of the largest mobile operators worldwide with interest in 12 mobile operators across Europe and Asia. The expectation of long term success by a committed major shareholder like Telenor further boosted investors’ confidence in DiGi.
The next step is to read the financial reports of DiGi in order to understand the company and its earnings power. A review of DiGi’s FY3/2000 annual report shows that profit before tax has improved from a loss of RM77.1 million in FY1999 to a profit of RM23.2 million in FY2000. Despite its relatively small size compared to its competitors, DiGi beat the odds and flourished in a very competitive industry. There are several reasons for DiGi’s success:
- Innovative products
- Improved network quality and coverage
- Aggressive pricing strategies
- Better brand image
Quarterly results is one of the factors that affects the short-term volatility of a stock. In fact, between FY 3/1999 and FY 3/2000 when the quarterly results started to reveal that DiGi earnings had turned around, the price appreciated about 380%, translated to a PE ratio of 270 times. However, not everyone could time the turnaround and accept such a high PE valuation. It is therefore better to focus on earnings power of a company.
One good validator is the cash flow statement because it emphasizes that it is cash, not net profit, which must be used to repay loans, to replace and expand plants and equipment, and to pay dividends.
From the FY 3/2000 annual report, an investor could have noticed that even in the year FY 3/1999 when DiGi ran into losses, it continued to generate positive cash flow from operating activities. Since operating cash flow focuses on the liquidity aspect of operations, DiGi’s positive operation cash flow thus provides an indication of its short-term liquidity and long-term solvency.
Although DiGi’s share price has shown some weaknesses during FY2002 as a reflection of anticipated poorer profit before tax margin (due to higher depreciation costs and net interest expense) and earnings per share (deferred tax charge of RM44.9 million vs. tax write back of RM37m in FY2001) in FYE 12/2002, the operating cash flow was actually stronger than the previous year. This is an indication that in the short-term, market focuses on profit and profitability rather than cash flow, which is essential to a healthy financial condition in the long-run.
Ads show DiGi’s aggressive marketing strategy
By practising some creative intelligence gathering, individual investors would have noticed from the many advertisements by DiGi that DiGi has gone on an aggressive marketing strategy to increase its market share.
DiGi took the industry by surprise when it introduced a flat-rate pricing for the entire country for postpaid users, enabling one to make a call throughout Malaysia at the price of a local call. This helped DiGi grow its postpaid subscriber base by four-fold to 442,000 between 2003 and mid-06. Also, DiGi was the first telco to slash the rates to foreign destinations.
A healthy operating cash flow has enabled DiGi to focus on its core business and continue to build its brand name. These strategies paid off as can be seen from DiGi’s rising revenue and subscriber market share, and the improvement in margins and profits which was ultimately rewarded by the market via share price appreciation.
Thus, an investor who invested in DiGi in 2001 and held it until the end of 2005 would have enjoyed a cumulative return of 62.5% which translates into a compounded return of 10.2% per annum.
While share price may also reflect factors other than fundamentals in the short-term, DiGi’s case (2001 to 2005) provides empirical evidence that fundamentals do matter in the long term. Simplicity in information gathering through financial reports and creative intelligence gathering (e.g. newspapers, advertisements, etc.) can help an investor fill in the decision mosaic more clearly.
In conclusion, DiGi’s success story during the period is demonstrated by an experienced management team that is committed in delivering shareholders’ value. The simple research approach that is discussed above will help individual investors to uncover a successful stock like DiGi.
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