DiGi.Com Bhd's capital distribution announcement came as no surprise to the investment community and was welcomed as a timely initiative.

The company's management had previously indicated that it would undertake capital management initiatives to reward shareholders, who had bought into the strong dividend-yielding stock, in anticipation that its earnings for the next three financial years will be impacted from accelerated depreciation charges related to existing equipment as the company commenced its network modernisation programme.

OSK Research Sdn Bhd said it was positive on DiGi's capital distribution exercise as it was a move long expected.

“The exercise addresses concerns on the group's ability to distribute more cash to sustain its over 100% dividend payout due to the lack of retained earnings at the holding company and more importantly, it provides dividend certainty in the current market environment,” OSK Research said in a report last Friday.

DiGi told Bursa Malaysia last Thursday that its wholly-owned unit DiGi Telecommunications Sdn Bhd (DiGiTel) will undertake a capital distribution of RM509mil to DiGi. The exercise entails DiGiTel issuing 100,000 redeemable preference shares (RPS) to DiGi at a nominal price of one sen per RPS, and a redemption at RM5,090 per share would raise RM509mil cash, or 65 sen per share, for DiGi.

DiGi intends to distribute the excess proceeds from the capital distribution to all its shareholders by the first half of next year.

DiGi Telecommunications will undertake a capital distribution of RM509mil

The company has previously said that it would pay out at least 80% of its earnings as dividends but since it will experience lower profits for financial year 2011 (FY11) due to accelerated depreciation, the capital management initiative will be another means of keeping shareholders happy.

The company's books will also have accelerated depreciation charges for financial years 2012 and 2013, prompting DiGi to look at other capital management initiatives for those financial years.

The estimated accelerated depreciation for existing equipment in its network for this year is up to RM450mil, up to RM550mil next year and less than RM100mil in 2013. The depreciation will not have any adverse impact on the group's operating cash flow.

ECM Libra Investment Research expects DiGi to pay 100% of its earnings as dividends for FY11, on top of its 65 sen per share capital repayment.

“Hence, this means that FY11 dividends will come in at 205.5 sen (our forecast earnings per share of 140 sen plus the 65 sen capital repayment). For FY12, we are estimating a conservative dividend forecast of 154.3 sen, which amounts to a 100% payout. There is upside risk to our FY12 dividend forecast as we estimate free cashflow to be higher at RM2.40 per share, which could well be paid provided DiGi completes its second round of capital management initiatives in time,” it said in its report.

OSK Research also upped its dividend per share forecast to RM2.03 per share from RM1.63 per share.

While DiGi's management has indicated that there would be more capital management initiatives to offset the accelerated depreciation charges for FY12 and FY13, analysts said these initiatives would not be similar to the capital distribution recently announced as there were no more significant amounts of share premium account from DiGi's subsidiaries to flow up to the holding company.

Alongside its capital distribution announcement, DiGi also said it was proposing a share-split, whereby it would split each existing share into 10 ordinary shares so that DiGi's shares are more affordable to a wider reach of investors and the company's liquidity would improve on the local stock market.

Therefore, each existing share of 10 sen will now be 10 ordinary shares of one sen each. Thus, the number of company shares will increase to 7.775 billion shares of one sen each from 777.5 million shares of 10 sen each now. The proposal should be completed by the fourth quarter of this year.

On another note, analysts said DiGi stands to benefit the most with the passing on of 6% service tax to prepaid subscribers starting Thursday, in comparison to its other telco peers, as DiGi has the largest portion of revenue from the prepaid segment at 75%.

HwangDBS Vickers Research said that the tax pass-through raises its FY12-FY13 forecast earnings by 5%-6%, assuming marginal 2% reduction in prepaid average revenue per user (to RM38-RM40).

“We believe the increase in prepaid costs could cause price-sensitive subscribers to reduce usage, and DiGi may cut rates to drive up usage. FY11 forecast earnings are also raised by 2%,” it said.