Digicel US$1-b expansion should be completed by next March

Revenue diversification paying off

Sunday, May 25, 2014

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DIGICEL Group is expected to complete a two-year, US$1 billion expansion by next March.

Ratings agency Fitch said an increase in annual capital expenditure from US$360 million in the 2013 financial year was due to network expansion in its various markets, including a new tower project in the South East Asian country, Myanmar.

"Fitch forecasts Digicel to generate negative free cash flow (FCF) in FY2014 and FY2015 due to high capex and dividends, despite stable performance," said the rating agency in an affirmation of Digicel's ratings. "In those two years, annual capex is expected to increase to between US$470 million and US$500 million. However, Fitch believes that FCF generation could turn positive from FY2016 as expansionary capex falls in the absence of any sizable special dividend."

Indeed, the telecommunications company generated stable operating results for its first nine months to December 31, 2013.

The group's constant-currency-based revenue posted modest growth of three per cent while its earnings before interest, tax, depreciation and amortisation (EBITDA) margin improved to 45 per cent, up from 44 per cent in the previous year.

"This was mainly driven by increasing data revenue supporting average revenue per user (ARPU), a decline in churn rates, as well as strong growth in Papua New Guinea (PNG), Trinidad & Tobago, and French West Indies," said Fitch. "Stable subscriber number growth continued, with the total subscriber base reaching 13.4 million at the end of 2013 from 12.8 million a year ago."

PNG returned the strongest growth in any of Digicel's markets -- in the three months to December 31, the local-currency-based revenue in PNG grew by 11 per cent year over year -- which offset weak growth in other major countries of operation, such as Jamaica and Haiti. The PNG market accounted for 17.7 per cent of the total group revenue in US dollar terms by the end of 2013 based, still behind Digicel's largest market, Haiti, which accounted for 18.9 per cent of revenue.

But another important milestone reached in diversifying away from the traditional mobile voice was the increase in the contribution of data-based value-added services (VAS) to revenue from 23 per cent of income a year before to 26 per cent.

"Increasing smartphone penetration, which rose to 20 per cent at the end of 2013 from 13 per cent a year ago, should continue to support this trend," said Fitch. "The company has made several acquisitions in the submarine fibre network and cable operations to cope with the data capacity increase to reinforce this strategy."

Digicel's information and communications technology (ICT) business, which is mainly business solutions and data management for corporate customers, also grew to US$21 million during the last three months of 2013, or by 23 per cent over the previous quarter. However, revenue from ICT services still only represented three per cent of the consolidated revenue of Digicel Group during the quarter, according to Fitch, suggesting that revenue during the last quarter of 2013 totaled US$700 million for the telecommunications company.

"This segment (ICT) is likely to become a meaningful cash generator over the long term as the demand outlook is solid," said Fitch.




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