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