Thu | Sep 21, 2017

JMMB puts underweight rating on Digicel bonds

Published:Wednesday | February 8, 2017 | 2:00 AMSteven Jackson
The top of the Digicel Building on the Kingston waterfront, headquarters of the telecom group.

Financial outfit JMMB Group describes Digicel Group as suffering from flat subscriber growth and currency concerns, but still expects the telecom to better service its debt this year.

The regional investment house assessed as "underweight", which it defines underweight as a state in which investors should reduce exposure in their portfolio to less than five per cent for a particular asset.

"... Digicel continues to be recommended as underweight and is suitable for investors with a high-risk tolerance and who are also comfortable with the likely volatil[ity] in security prices," stated JMMB in its research paper dated February 2017.

JMMB did not respond to quests for further comment, but said in its research paper that its outlook on Digicel is basically unchanged from last year.

"Our outlook for Digicel has not altered since our July 2016 report in which we noted that Digicel's mobile subscriber growth has stagnated while the cable TV, broadband and fixed lines of business are not growing at a fast enough rate to offset foreign-exchange translation losses," said the investment house.

 

Risk-free rate

 

JMMB reasoned that since the year began, the spread on Digicel's 2020 bond has narrowed towards that of the risk-free rate, that is, the US Treasuries bill rate. At January 19, the Digicel 2020 bond was trading 1,034 basis points above the risk free rate, down from a spread of 1,281 basis points a year prior. This could be interpreted, JMMB said, as "improving confidence in Digicel's ability to service its debt or greater willingness to take risk by investors" as they seek out higher yields in a low interest rate global environment.

JMMB also indicated that with an interest coverage ratio in excess of 1.3 times and a current ratio just above 0.8 times that it appears Digicel should be able to meet its obligations.

"However, erratic profitability due to stagnant growth and weakening local currency revenues and a large debt burden remain causes for concern," added JMMB, adding that Digicel needs to constantly reinvest in the company.

"Given stiff competition and the fast pace of innovation in Digicel's business lines, constant capex is required and will continue to put pressure on cash flows which will require greater leverage if funding is not generated at a sufficiently level internally."

Digicel also did not respond to requests for comment.

Digicel Group made less revenue and earnings in its September 2016 second quarter, due in part to currency fluctuations in key markets, according to an investor release from Barclays in December. Revenue for the telecoms, which operates in 32 countries across the Caribbean and Pacific islands, fell seven per cent to US$638 million, while its earnings before interest, tax, depreciation and amortisation, or EBITDA, declined 14 per cent to US$253 million, according to Barclays' analysis of Digicel Group's recent developments and earnings.

"We reiterate our overweight rating on Digicel Group (DLLTD), following the release of 2QFY17 results," Barclays said.

steven.jackson@gleanerjm.com