Telecom’s strong EBITDA growth support heavy borrowing
Wednesday, June 24, 2009

The US$41-million annual net profit that Digicel Group reported for its financial year that ran to March 31, 2009, did little to impact the more than US$1.2 billion it has racked up in deficits over the years since it started operating in the region eight years ago.

The RKA building in which Digicel's Jamaican operations is headquartered.

The telecommunications company’s deepening foray into the region is also carrying with it a burgeoning debt, which has been supported primarily by Digicel’s strong growth in earnings before interest, tax, depreciation and amortisation (EBITDA) and which carries a high interest component that draws down huge amounts of cash out of the firm’s coffers.

The Irish-owned telecom, which started operating in the region when it opened its doors in Jamaica in 2001, has actually been posting quarterly net profit, albeit small relative the sizeable deficit, since the December quarter of 2007 and has seen considerable improvement over the last two quarters reported - US$10.5 million in the December quarter of 2008 and US$24.8 million in the March quarter this year.

But the group’s accumulated deficit stood at US$1.22 billion at the end of March this year placing its equity position at US$983 million in the red. Hence, huge amounts of debt and with it high interest costs are carried on the books of the company.

The group’s total liabilities stood at US$3.6 billion compared to its asset base of US$2.63 billion at the end of March this year, while debt payments totalled US$338 million up from US$296 million the year before -a 14 per cent increase in finance cost.

In terms of its working capital, Digicel Group saw its current assets exceed current liabilities by US$12 million at the end of March this year, which was an improvement from the US$23 million working capital deficit it had at the end of the 2007/2008 financial year.

This, however, may have gone back in the red as the firm forked out US$215 million cash for a 35.8 per cent stake in Digicel Holdings Central America Limited on April 1. That payment was made from US$335 million 12 per cent, five-year bond that was issued in March this year.

The purchase of the central American asset in April only partly reflects Digicel’s high levels of capital expenditure over the years - US$313 million for the year to March 31, 2009 compared to US$373 million the year before.

The heavy borrowing that has supported the group’s capital investment over the years has been supported by strong EBITDA growth.

Total debt relative to EBITDA has been shrinking on a quarterly basis since December 2007 and stood at 4.6 times (total debt to EBITDA) at the end of March this year compared to the 6.1 it stood at the end of December 2007.

Digicel earnings have traditionally banked on revenues out of Jamaica, which during the March quarter represented 27 per cent of revenue for the group and for the year to March 31 was closer to 29 per cent.

During the March quarter Digicel experienced an 11 per cent decline in revenue from its Jamaican operations, or earned US$111 million in sales, a four per cent decline in Trinidad and Tobago, while the French West Indies saw a decline from US$49 million to US$45 million.

All other markets combined climbed over the comparative quarter in 2008.

But even while the group’s subscriber base grows and revenue climbs in some markets the average revenue per user (ARPU) each month is falling off dramatically.

What stood at an average of US$21.80 in March 2007 stood at US$18.30 per user in March 2009. Even at constant currency, the ARPU was lower at US$19.90.

The constant currency analysis was done to reflect revenue growth in key markets where devaluation ravaged earnings made in local currency.

For instance, in Jamaica, without the 23 per cent devaluation experienced over the year to March 31, 2009 revenue would have looked like US$130 million - three per cent higher than the comparative period in 2008 using the average exchange rate for the quarter ended March 31, 2008.

Source: Jamaica Observer