Thursday, October 4, 2012

Is Digi pricier than Maxis: A look at EBITDA

One of the most amazing stocks which I owned was Digi, although I have sold the stock much earlier. I remember Digi used to be 4 times smaller then Maxis in terms of market cap when I bought the company - of course it was a larger Maxis then. However, Digi continued to grow at a very fast pace - and now Digi is the 7th largest company in Bursa. The thing about stock is that - as proven in Digi's stock price movement - the more confident the stock provide to its investors the higher the PE becomes. There is no doubt that Digi is getting on the pricier side now but this article is to evaluate whether Digi is much more expensive in comparison to its competitor - Maxis. To find the answer, let's look at EBITDA.

Based on the table below, on the onset, looking at Net Profit numbers, it looks like Maxis is 2x more profitable than Digi. Add back the taxes, it shows Maxis's PBT is 193% larger than Digi's - hence the size of profitability for Maxis against Digi shrank. After adding interests, depreciation and amortisation, it shows that Maxis's EBITDA is only 158% larger than Digi.

As you can see, the percentage of EBITDA over Net Profit for Maxis is 173% while Digi's EBITDA to Net Profit is 220%. This shows that despite Digi has a whopping 33.84x PE Ratio based on historical 2011 numbers as against Maxis's 20.86x, EBITDA would have narrowed the perception over Digi is way more expensive.

The "Market Capitalisation to EBITDA" for Digi is 15.35x while Maxis's is 12.05x. This shows that Digi, when looked at EBITDA may not be that expensive against Maxis.

The question is now, would EBITDA be relevant here as the right measurement? Yes. Digi has depreciated and amortised more than Maxis and these are non-cashflow items. In fact, Digi's interest expense was way smaller than Maxis due to the latter's balance sheet is with higher debt whereas Digi's balance sheet is stronger.

And with Digi having the strongest growth over the last few years, it seems that Digi may not be that expensive after all.

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