Digistar Corporation Berhad: A Tenuous Turnaround in a Volatile Market

The stock of Digistar Corporation Berhad (KLSE:DIGISTA) has long been a rollercoaster for investors, oscillating between speculative optimism and deep skepticism. Yet, recent developments—particularly a stabilization in its Return on Capital Employed (ROCE) and a reduction in capital employed—have reignited debates about whether the company's turnaround fundamentals can justify renewed investor confidence. For a stock that has lost 89% of its value over five years, the question is not just about recovery but about whether Digistar can avoid repeating its history of cyclical underperformance.

ROCE: A Modest but Encouraging Trend

Digistar's ROCE, a critical metric for assessing capital efficiency, has shown a tentative upward trajectory. As of March 2025, the company reported a ROCE of 3.1%, calculated as RM7.6 million EBIT divided by (RM306 million total assets minus RM59 million current liabilities). While this figure remains far below the IT industry average of 12%, it marks a significant improvement from a decade of losses and negative ROCE. For context, in 2024, Digistar's ROCE was 3.7%, and in 2023, it stood at 5.2%. The gradual climb, albeit from a low base, suggests that the company is beginning to generate returns from a smaller capital base, potentially through asset divestitures or operational streamlining.

However, the ROCE's improvement must be contextualized. The company's capital employed has shrunk by 24% over five years, a reduction that could reflect the sale of underperforming assets or a strategic pivot to focus on core operations. While this is a positive sign, it also raises questions: Is Digistar optimizing its capital, or is it simply shrinking to survive? The answer lies in the sustainability of its current ROCE. A 3.1% return is barely above breakeven in a high-debt environment, and with a debt-to-equity ratio of 315.9%, the company's leverage remains a drag on profitability.

Strategic Initiatives: A New Shareholder and Capital Restructuring

Digistar's recent strategic moves offer a glimmer of hope. In January 2024, Gan Boon Tian emerged as a major shareholder, acquiring 12.9% of the company via a private placement. This infusion of capital, coupled with a RM9 million fundraising in 2024, signals an attempt to stabilize the balance sheet and fund new ventures, such as its pay-TV initiative. Additionally, the company has issued warrants and new shares to bolster liquidity, including a March 2025 listing of 9.74 million shares at MYR 0.06 each.

Yet, these actions are a double-edged sword. While they provide short-term liquidity, they also dilute existing shareholders, a practice that has historically eroded investor trust. The company's market cap of MYR25 million and its 91.8% discount to fair value suggest that investors remain skeptical about the long-term value of these initiatives.

The Risks of a Volatile Turnaround

Digistar's stock price volatility—averaging 26.5% weekly movements—underscores the fragility of its current trajectory. Despite a 29% share price surge in July 2025, the stock remains 89% below its five-year peak. This volatility is compounded by the company's earnings history: 11 of the last 12 years have recorded losses, and its EPS has been negative in most periods. Even in Q2 2025, Digistar reported a profit of MYR52,000, a stark contrast to the MYR1.31 million loss in the same quarter of 2024. Such erratic performance makes it difficult to assess whether the company's recent gains are a sustainable turnaround or a temporary rebound.

Notably, the stock has shown a positive reaction to earnings surprises in recent years. Since 2022, Digistar has beaten earnings expectations on six occasions, with the most recent instance on September 30, 2024, triggering a 1.94% price surge. While these instances are relatively modest in magnitude, they suggest that the market occasionally rewards the company's ability to exceed forecasts, even amid its broader volatility. This pattern indicates that, despite its historical instability, Digistar's stock can respond favorably to short-term positive catalysts—though such gains are often fleeting and require careful risk management.

A Cautious Case for Optimism

For Digistar to justify renewed optimism, it must demonstrate that its ROCE improvements are not just a function of shrinking capital but a result of disciplined capital allocation. The company's focus on its concession segment—a privatization arrangement with the Malaysian government—could provide a stable revenue stream. However, this segment's success hinges on the government's continued partnership and the company's ability to execute projects profitably.

Investors should also monitor Digistar's debt management. With a net profit margin of -11.62%, the company's ability to service its debt is precarious. Any further deterioration in earnings could trigger a liquidity crisis, forcing more dilutive fundraising.

Final Verdict: A High-Risk, High-Reward Proposition

Digistar Corporation Berhad's improving ROCE and capital efficiency are encouraging, but they are not sufficient to justify a bullish stance. The company's historical volatility, high leverage, and inconsistent earnings paint a picture of a business in transition rather than one on a clear path to growth. For risk-tolerant investors, the stock could offer speculative upside if the company's strategic initiatives pay off and ROCE continues to trend upward. However, for most investors, the risks—particularly the potential for further dilution and earnings volatility—outweigh the rewards.

In the end, Digistar's turnaround remains a work in progress. The next few quarters will be critical in determining whether the company can transform its modest gains into a sustainable recovery—or if it will once again fall victim to its own financial turbulence.