We introduce this pilot report on sustainability review hoping to bring awareness and help enlighten investors on parameters concerning aspects of sustainability being recognised and measured. We start off with DIGI, having based its disclosures around GRI indicators and taking a page or two from its parent company, Telenor Group. Taking a look at certain key aspects of DIGI’s Sustainability Data Book 2019, we found that DIGI has been registering higher energy consumption coinciding with its network expansion of which it aims to reduce by 50% in 2030. Social sustainability warrants tight data privacy and security measures of which DIGI and we believe by extension, other telcos would be commonly practicing. Fundamentally, we have a DCF-driven TP of RM4.65 for DIGI. Banking on its industry-leading dividend yields of c.4% and ROEs of above 200%, we raise our call to OUTPERFORM (from MARKET PERFORM) given the attractive capital upside of c.10% from current levels. Even as our TP is achieved, we believe DIGI would remain a favourable investment on sustainability considerations by ESGconscious investors.

Sustainability reporting a growing importance. Sustainability is gaining global traction with the rise of issues such as high levels of carbon emissions, direct/indirect impact to health, human rights, un-sustainability and over-dependency of non-renewable energy, among others. A growing school of thought implicates that solid sustainability management goes hand in hand with better risk management as the former also works to improve efficiency and resiliency of operations in the long run while incorporating healthy practices as a norm, hence creating greater long term value. Bursa Malaysia took a step into this by introducing the FTSE4Good Bursa Malaysia index in 2014 to formally recognise companies which take major steps in promoting sustainability as well as other key aspects of ESG governance.

DIGI, a maiden choice. In this pilot report, we level DIGI’s published annual report on sustainability which we found to be compelling as it blends requirements from GRI indicators, GHG Protocol Corporate Standard for carbon emissions while also incorporating practices for its parent company, Telenor Group where ESG adoption are deemed to be more matured. DIGI was also the first amongst the telcos to publicly publish any measure of sustainability reporting, tracing back since 2009. Typical disclosures encompassing sustainability would concern carbon emissions, business impact to the environment and by extension, its supply chain. Adding to that, social sustainability which has been under a brighter spotlight is also under the purview of DIGI’s sustainability, touching base on customer data privacy and security. (Refer to the overleaf for our review on key matters in DIGI’s Sustainability Data Book 2019)

Overall, we believe DIGI’s sustainability efforts and disclosures to be exemplary with records openly presented regarding its carbon footprint performance. The group saw a rise in total energy consumption from 2017 to 2019 but registered strong improvements when measured against the total data consumed by its subscribers. Although there are certain areas which we believe could add great value if provided, such as a breakdown of its renewable energy consumption. DIGI’s social proactiveness and responsibility appears to be deeply embedded in its corporate culture which forms a conducive workplace. Perhaps one could argue that this has translated to its stellar efficiency and profitability, commanding the highest net profit margins of +20% and ROEs exceeding 200%. We believe that industry players could always do more in terms of sustainability disclosure and seeking insight from countries where their practice has some maturity which would assist in building credible reporting. Other widely adopted sustainability reporting standards include the Task Force on Climate-Related Financial Disclosures (TCFD), Carbon Disclosure Project (CDP), and International Integrated Reporting Council (IIRC).

We take this opportunity to also upgrade DIGI’s call to OUTPERFORM, from MARKET PERFORM in lieu of share price weakness which makes accumulation attractive. Though we maintain our DCF-driven TP of RM4.65, dividend yields of over 4% could be sought out by yield seeking investors in the currently volatile market and low interest rate environment. The group is weathering through certain hurdles posed by the Covid-19 pandemic and post-MCO economic easing, but we believe this to not be a long-term concern. DIGI already command the largest prepaid market share in the country and lowest overall ARPUs, greatly minimising customer down-trading risks as compared to other market leaders.

Source: Kenanga Research - 26 Jun 2020