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Wednesday, June 15, 2011

Digistar on M&A trail (Edge)

Digistar Corp Bhd is taking the merger and acquisition (M&A) route to spur the company’s next phase of growth in the broadcasting engineering and Internet protocol television (IPTV) markets.

Executive director Lye Siang Long said following years of organic growth, the company was now scouting for foreign M&A targets and active talks were already ongoing with several parties. However, no agreements have been signed so far.

Digistar currently derives its revenue solely from the domestic market.

Not many may have noticed that the switch from analogue to digital system for broadcasting system globally is indeed a key catalyst for Digistar’s earnings growth in the future.

The switch is in anticipation of the International Telecommunication Union’s deadline of June 17, 2015 for the conversion to digital platforms to take place in the broadcasting industry.

To fund its M&A activity, Lye said Digistar might embark on another round of fund-raising after the recent share placement. But the mode of the fund-raising exercise would depend on the business opportunities crossing the company’s path.

“If business negotiations go through, then we might need to raise fund,” said Lye.

The company’s latest set of quarterly results has shown big improvement on earnings. Net profit rose 10 times to RM4.57 million in 2Q ended March 31 this year, compared with RM457,000 a year earlier as revenue grew 91% to RM23.57 million from RM12.31 million. Bottom line had improved as the firm secured jobs with higher profit margins.

The company has a strong balance sheet. It had cash of RM25.58 million versus debts of RM454,000, translating into a net cash of RM25.13 million as at March 31.

Analysts foresee Digistar forming joint ventures with foreign companies to spur the local entity’s regional expansion. In a recent report, SJ Securities said should the plan materialise, Digistar would be a major player in the Asian broadcasting engineering market.

The research house added that Southeast Asia alone could be a multi-billion dollar segment, and that Digistar had the capabilities to expand its reach across Asia where many regional broadcasting entities have yet to switch from analogue to digital system,

“We predict short supply of expertise and consultants in broadcast engineering throughout Asia. The majority of countries have not converted into digital broadcasting system and the 2015 deadline for the transition is only a few years away.

“If Digistar were to get a slice of the huge pie, the group would see supernormal growth,” SJ Securities said.

In Malaysia, SJ Securities said Digistar by virtue of its expertise and experience in the broadcasting engineering business, is deemed a front-runner to capitalise on the local entities migrating from analogue to digital system.

“We like Digistar for its huge potential growth prospects and growing recurring income base. Moreover, the industry environment and developments for the media and healthcare industries are very favourable for the group,” SJ Securities said.

The research house’s forecast shows that Digistar’s FY11 net profit would grow fourfold to RM17.3 million from RM4.3 million a year earlier. Revenue is expected to rise 46% to RM107 million from RM73.3 million.

The research house has a target price of 92 sen for Digistar shares based on a price to earnings multiple of seven times FY11 earnings.

In terms of share price performance, Digistar is certainly a star performer among the ACE-listed companies.

The stock has more than tripled with nearly 225% gain since the start of the year. During the last six months, Digistar shares hit a high of 47 sen on May 13, rebounding from a low of 12.5 sen in late December last year.

Digistar shares closed at 45.5 sen yesterday with a market capitalisation of RM96 million.

ACE market-listed Digistar is seeking an upgrade to the main market possibly in the next financial year.

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