Investment Highlights

• We maintain our BUY call on Axiata Group (Axiata) with unchanged forecasts and sum-of-parts-based fair value of RM5.32/share, which translates to a FY19F EV/EBITDA of 6x, 1 SD below its 3-year average of 7x.

• Axiata’s 63%-owned edotco Group has entered into an agreement to subscribe for an 80% stake in a Laos-based tower company called Mekong Tower Company Ltd (MTC) for LAK13mil (RM6mil) cash.

• The subscription is conditional upon MTC securing the operating licence from Laos’ Ministry of Post and Telecommunications to provide infrastructure solutions to telecommunications and network operators.

• edotco is expanding into a new geographical market with plans to grow its sites organically via build-to-suit as well as inorganically with sale-and-leaseback prospects.

• The Laos tower market is expected to undergo strong growth with an estimated demand of over 5,000 towers over the next 3 years, propelled by a drive towards 4G adoption.

• Assuming edotco secures a 10% market share in the Laos tower market, this will only account for 1.7% of the edotco’s current portfolio of 29.1K towers. This comprises 17.8K towers of which the group owns while managing an additional 11.3K sites with a tenancy ratio of 1.6x.

• edotco, which is a telecommunication tower provider operating in Bangladesh, Cambodia, Sri Lanka, Myanmar and Pakistan, accounted for 8% of 9MFY18 group revenue and EBITDA.

• We do not expect significant addition from this development to Axiata’s FY19F capex of RM7bil, of which edotco is expected to account for below 10%.

• Meanwhile, Axiata is prioritising opex and capex efficiency, which will mean lower capex intensity, requiring shorter term EBITDA positive impact.

• As such, 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 300 basis points against the backdrop of declining data yields and rising overseas regulatory costs.

• For the group’s FY18 results, which is scheduled to be announced on 22 February, we expect some disappointments from non-core impairments of non-productive/end-of-life assets due to aggressive modernisation, such as largely unutilised 2G equipment and legacy ICT systems.

• 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 - 30 Jan 2019