Timedotcom (TDC) has proposed to distribute to its shareholders a dividend-in-specie of up to 137.5m Digi shares, representing 1.7% of Digi's issued share capital. TDC shareholders will receive 6 Digi shares for every 25 shares based on an entitlement date to be announced later. 

Some overhang. We expect the exercise to give rise to an overhang on Digi shares as the transaction involving 137.5m shares works out to RM1.16 per TDC share, based on Digi's last closing price, or 33% of TDC's market capitalization. Digi's share price raced to a record high of RM5.48 in October but has since fallen back in tandem with the broad de-rating on the telco sector. While TDC did not reveal what it plans to do with the remaining 1.7% stake in Digi, we believe it would in due course look to monetize the shares, held since 2008.

Exploring a business trust. Digi's dividend payout is capped at 100% of earnings as it has exhausted its distributable reserves, having previously upstreamed cash from wholly-owned Digi Telecommunications. At a recent luncheon hosted by management, Digi said it is exploring the possibility of setting up a business trust, which would allow it to pay dividends out of cash flow as opposed to accounting profits, so as to alleviate the constraints faced at the listco.

20MHz LTE spectrum. Digi has been allocated a 20MHz block of the 2.6GHz LTE spectrum, which will pave the way for the telco to introduce LTE services in the coming months. Compared to Maxis and Celcom which have forged partnerships and infrastructure/spectrum sharing agreements with other LTE spectrum recipients, Digi would have to make do with its existing allocation, which could affect its competitive advantage in the longer term.

Maintain NEUTRAL. We are retaining our NEUTRAL recommendation on Digi based on a RM5.00 FV (8% WACC). We prefer Axiata (BUY, FV: RM6.62) and TM (BUY, FV: RM6.20) for exposure to the sector given their larger share price upside potential.

Source: OSK