DIGI and Sunway REIT(stocks of my interest)

from kenanga

 

DIGI: Its 2QFY2013 higher revenue was driven by increasing mobile internet usage. Some 64% of its subscribers are mobile internet users while smartphone penetration stood at 30.4%.

DIGI’s strategy to bundle voice and SMS into its data packages appears to be paying off, offsetting the decline in SMS revenue a subscribers turn, increasingly to messaging apps such as Whats-App. Voice revenue appears to have stabilized.

In tune with the global trend data, data consumption will continue to grow as more users upgrade from feature to smartphones coupled with increasing proliferation of tablet devices. Faster network speed and better consumer experience will further promote data usage. The average data consumption for smartphones is on an upward trajectory.

DIGI is positioned to capture this growth now (July 2013) that it has almost completed its network modernization exercise. The company has expanded its 3G coverage to 72% of the population and it is targeted to reach 75% by end 2013. The joint built fibre, with Celcom too is progressing well with some 1012km completed.

After the same time, the company has also started rollout for the next generation LTE network, beginning with the Klang Valley and it is slated to reach 1500 sites by end 2014.

 

While DIGI is not expected to excite with a blazing pace of growth, expect the company to report decent earnings expansion going forward. Its strong cash flow would also ensure steady and consistent dividend payments.

At the prevailing price of rm4.63, the stock is trading at lower valuations compared with Maxis and at just a slight premium to M1 and Starhub. Earnings for all telcos are predominantly domestic based whereas Axiata and SIngtel have wider geographical footprints. Overseas expansion offers the potential for stronger growth but also carry higher risks.

Although DIGI’s dividend yield for the current year (FY2013) is comparatively lower, there is a good chance for dividend growth gong forward. Due to the company’s limited reserves (following bumper dividends and capital repayments over the past few years), dividend payments are capped to annual earnings.

Given DIGI’s track record for returning excess cash to shareholders, estimates the company will pay out all of its profits

Note that should DIGI adopt a business trust structure – a move that is currently (July 2013) – the total dividends payable would likely exceed its existing estimates.

DiGi.Com Bhd is set for higher margins in the second half 2013 with potential for more capital distribution if it adopts a business trust structure.

The ending of additional operations and maintenance expenses relating to network upgrades in second half of 2013 would give a lift to DiGi’s margins. This also sets a higher (margin) base for 2014, and is a catalyst for a re-rating.

At higher levels of payout from DiGi going forward, as its parent Telenor will be making significant investments in Myanmar. There is a high probability that DiGi will take on a business trust structure which will enable it to distribute more capital (as it will benefit Telenor).

Sunway REIT: There are a myriad factors that would likely temper interest in REITS at least in the near to medium term.

Key among the issues is expectations of a gradual normalization of global interest rates from historic low levels as the US starts to roll back its aggressive monetary policies. Rising yields on risk free government bonds would render fixed income bonds and high yielding stocks less attractive.

Generally speaking, the latter category should fare comparatively better expectations that corporate earnings growth will translate into higher yields – and yields – over time. IN this respect, REITs could face some challenges.

High property prices make it difficult for REITs to expand via acquisition of quality, yield accretive assets. In the absence of new acquisitions, REITs would be dependent on organic rental increases to drive earnings.

For Sunway REIT, its earnings over the next two years from Aug 2013 will be affected by major asset enhancement initiative, currently (Aug 2013) ongoing for the Sunway Putra Mall. The trust acquired Sunway Medical Centre at end 2012 and income from the property will help partially offset the loss of earnings from Sunway Putra Mall.

Expect distribution per unit to drop in 2014 and 2015.

Occupancy and rental outlook for the office segments is downbeat on the back of forecasts of space over supply over the next few years from 2013. This will translate into limited income growth for many of the office focused trusts.

Office properties in Sunway REIT’s portfolio saw pressure in its last financial year ended June 2013. With a significant portion of leases up for renewal in FY2014 and FY2015, earnings could see further downside risks.

Sunway’s REIT’s hotel assets also fared poorly in FY2013 with revenue down on the back of lower occupancy. The trust is relying on its retail assets to be the primary driver for the growth.

Revenue from its four retail assets, combined was up 1.3% year on year contributing to 71% of Sunway REIT’s total revenue in FY2013.

Sunway REIT’s flagship Sunway Pyramid shopping mall registered 18.1% rental reversion for leases renewed in FY2013 which accounted for about a quarter of total net lettable area. The shopping mall alone contributed to 57% of total turnover for the trust.

With another 52.5% of its leases due in FY2014, Sunway REIT is banking on FY2014 rental, reversion to sustain earnings – partially offsetting the loss of income from Sunway Putra Mall which is close for two years from 2013 for extensive refurbishment. Refurbishment works are likely to affect occupancy at its adjoining hotel and office tower.

The trust has earmarked some rm500 million in capex over the FY2014 to FY2015 for various AEIs. Other than Sunway Putra Mall, it is also undertaking AEI at Sunway Pyramid which will see some 20362 sq ft of additional retail space.

Going forward, new retail space, with a number of sizeable shopping malls coming into the market amid slower consumption, could pressure overall occupancy and future rental increases.