Denis O'brien, chairman and founder of Digicel Group. - File
Digicel Group Limited grew its operating profit six-fold in the financial year just past, but the company's bottom line continued to sag beneath the weight of the debt used by founder Irishman Denis O'Brien for the rapid expansion of his telecommunications empire.
In the year to the end of March, not only had DGL racked up an accumulated deficit of US$1.25 billion, but the firm remained so highly leveraged that its shareholder equity was a negative US$953.9 million.
Its net loss for the year was US$74.4 million, caused by US$296.4 million of financing charges and exacerbated by a US$26.7 million tax bill.
Surplus
However, with the group reporting a surplus on operations of US$240 million for the review period - a 496 per cent midline growth compared to the US$40.3 million earned last year - analysts suggested that on the face of it, O'Brien's company was in a good position to grow itself out of debt and produce net returns for its owner.
"In some industries, it takes time before you return a profit and telecommunications is one of them," one senior financial analyst told Wednesday Business yesterday. "And because the technology in this industry changes rapidly, this technology has to be depreciated very fast."
Moreover, this analyst explained, a telecoms firm in rapid expansion mode would have to assume costs related with acquisitions and licences as well as brand-building, "which is upfront money to stamp their name".
"In such a case, it takes some time to generate positive cash flow," said the analyst.
But he stressed that given Digicel's reported strong operating profit as well as the company's potential for continued income growth, "it probably takes no more than five years to wipe out the debt and move to net profit".
In fact, that timeline is precisely the same as Digicel projects its debts will mature in the audited financial statement, a copy of which was seen by Wednesday Business.
At the same time, though, O'Brien who holds 100 per cent of the company, was in the process of negotiating a new round of loans from World Bank subsidiary, International Financial Corporation (IFC), to support expansion.
Digicel has not responded to previous questions regarding those loans, but a posting on the IFC's website suggests that one of O'Brien's applications, a US$50 million to US$75 million loan for the Honduras operations, was approved and the deal sealed on August 20. Another US$70 million loan is pending approval.
Still, the company's financials show signs of improvement even at the bottom line which reflects a US$48.5 million, or 39 per cent, improvement on the near US$123 million it lost in FY2007.
Digicel Group was US$2.9 billion in debt at March 2008, which carries a heavier weight on the balance sheet than assets valued at US$2.4 billion - US$1 billion of which is fixed in property plant and equipment.
Total liabilities are just under US$3.4 billion.
The company's cash was somewhat depleted from US$297 million last year to US$151 million. This worsening cash position was the chief cause of the company's descent into a negative working capital position where its current liabilities exceeded current assets by US$24.6 million.
Its current ratio, or short term assets to short term liabilities which assesses a company's ability to cover its current year obligations in a crunch - was less than one at 0.95 times, compared to 1.15 times at yearend March 2007.
Digicel says, however, that it has an undrawn credit line of US$156 million that it can tap if needed.
The company has also indicated that it is making progress on managing its liabilities. In 2007, its debt was 7.8 times earnings before interest taxes deprecation and amortisation or EBITDA. In 2008 debt had declined to 5.0 times EBITDA.
"The group's policy is to de-lever the business through profitability, following the re-capitalisation in February 2007," says note 33d of the accounts, referring to O'Brien's debt-financed and full take-over of Digicel Limited, of which he then owned 80.9 per cent.
"Total debt is comprised of interest-bearing loans and high yield bonds (gross of deferred financing fees) and amounts due on licences and trade and other payables."
Digicel, which came on the scene six years ago, has been trying to grow its way to profitability. The group now operates in 23 regional markets while its sister operation in the Pacific region has established its presence in five countries, the latest being Fiji which launched operations a week ago.
In the past year, Digicel Group, which comprises 75 subsidiary companies spread across the Caribbean, Latin America and Europe - all but seven of which are 100 per cent owned by DGL - grew revenues by US$430 million or 38 per cent to US$1.56 billion, to outperform its own forecast of US$1.47 billion.
Jamaica which commands 1.9 million of the group's six million customer base remains Digicel's top money spinner, with US$490.5 million of revenue and US$209 million of operating profit earned from US$753.6 million of employed assets.
Gross profits were up by US$370 million, and profit margins on top and midline income were substantially improved: gross margin rose from 55 per cent to 63 per cent year on year; operating margin was up from three per cent to 15 per cent.
Analysts suggest that for highly leveraged companies like Digicel with negative shareholder equity, the performance of revenues and operating income are good measures of the company's prospects. Others are split on whether goodwill is a good test.
In DGL's case, its intangible assets, where goodwill is captured, were valued at US$905 million at balance sheet date.
lavern.clarke@gleanerjm.com
