AmInvest Research Reports

Author: AmInvest   |   Latest post: Fri, 15 Feb 2019, 10:27 AM


Axiata Group - Aiming for profitability and cash flow

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Investment Highlights

  • We maintain our BUY call on Axiata Group (Axiata) with an unchanged forecasts and sum-of-parts-based fair value of RM5.32/share, which translates to an unchanged FY19F EV/EBITDA of 6x, which is 1SD below its 3-year average of 7x.
  • We attended Axiata’s “Analyst Day” with its top management team yesterday, which stressed the group’s strategic shift towards profitable and operating cash flow growth by:
  • Reprioritising profit growth vs. revenue market share, with a preference towards faster growth for EBITDA compared with revenue, especially for core mobile operations.
  • Highlight opex and capex efficiency, which will mean lower capex intensity, requiring shorter term EBITDA positive impact. The group is targeting RM5bil savings over the next 5 years vs. RM1.3bil in 9MFY18, of which 54% stems from capex and the balance, opex. This will largely drive the group’s 5-year EBITDA improvement target of 300bps against the backdrop of declining data yields and rising overseas regulatory costs.
  • Review investments with longer duration payback periods, such as on fixed wireless home enterprise solutions vs. fibre options with minimal capex outlays.
  • Fund investments in new growth areas via strategic partnerships/financial investors such as in home wireless broadband solutions.
  • Monetise existing investments such as digital and new growth businesses for cash and investment validation. The group will review market conditions to sell non-core assets in which it lacks management control. Meanwhile, management views that the market has undervalued its digital investments, in which the group has invested US$197mil (RM825mil) in Axiata Digital’s businesses, which have registered gross revenues of RM170mil in 9MFY18.
  • Accelerate structural changes for industry consolidation, network sharing and productivity. While this may be more applicable for the group’s overseas operations, management reaffirms that “qualitative” factors for a remerger with TM, although quantitatively reasonable, are not conducive at the current juncture.
  • Impair non-productive/end-of-life assets due to aggressive modernisation, such as largely unutilised 2G equipment and legacy ICT systems, which could mean significant non-core impairments in 4QFY18.
  • Expect 2019 KPI changes to reflect these new strategic initiatives.
  • Axiata currently trades at a bargain FY18F EV/EBITDA of 5x, way below its 2-year average of 8x vs. Maxis’ 11x. The government’s intention to reduce Khazanah Nasional’s holdings in GLC-linked companies currently casts shadows of a share overhang.

Source: AmInvest Research - 27 Nov 2018

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