Investment Highlights

• We maintain our BUY call on Axiata Group (Axiata) with an unchanged sum-of-parts-based fair value of RM4.90/share which implies an FY20F EV/EBITDA of 5.5x – 1 standard deviation below its 3-year average of 6.2x.

• Following Axiata’s Analyst & Investor Day yesterday, we maintain our forecasts, supported by the following highlights:

• The group’s 3-year strategic evolution from Triple Core in 2015–2016 and 8 Strategic Needle-Moving Initiatives in 2017 to Shifting Gears Priorities in 2018–2019 to focus on profitability and cash growth appears to be bearing fruit, as management indicated it has achieved 72% or RM3.6bil of the targeted RM5bil group-wide cost savings for 2017–2021. By the end of this year, Axiata expects 75% of the cost savings to be delivered. So far in 2019, RM800mil has been secured in which XL contributed 40%, Robi 15%, Smart 14%, Celcom 11%, Dialog 9%, edotco 6% and NCell 5%.

• Axiata has already exceeded its 300ppt targeted improvement in FY22F group EBITDA margin by registering 37.8% (+290ppt) for 9MFY19.

• The group’s 9MFY19 capex of 24% to revenue is above its targeted level of <20% in 3–4 years. Whether the group is able to achieve this target depends on Axiata’s ability to share the infrastructure costs for the upcoming 5G rollout capex with other players.

• The group aims to deliver the lowest cost per GB data by FY22F by: (i) sweating existing assets by deploying analytics, just-in-time network upgrades and “just nice” quality proposition; (ii) leverage collective buying power by reducing radio network prices by 20% and expand aggregated group buying to 50% for the next 3 years; (iii) deliver flat cost trajectory via targeted programme; (iv) simplification and digitalization on sales & marketing, shift 50% of calls to digital platforms, double mobile apps penetration and automate by doubling active bots annually; and (v) reduce capital intensity by focusing on network quality, data capacity and selected opportunities outside core areas which have fast payback or reduce cost/GB.

• The group’s FY22F aspirational targets are: (i) group and XL’s ROIC to exceed WACC; (ii) building up digitalization and analytic functions by hiring >640 engineers and >270 data scientists/engineers/analysts; (iii) develop “smart networks” to increase video offerings; and (iv) reduce Celcom’s network costs/revenue by 2–3ppt and raise EBITDA margin by 3–4ppt.

• Axiata currently trades at a bargain FY19F EV/EBITDA of 5x vs. Maxis' 12x for a regional operator with excellent prospects of monetizing its multiple businesses.

Source: AmInvest Research - 3 Dec 2019