Investment Highlights

• We maintain our BUY call on Axiata Group (Axiata) with an unchanged sum-of-parts-based fair value of RM4.50/share, which implies an FY20F EV/EBITDA of 5.3x – 1 standard deviation below its 3-year average of 6x.

• Our FY20F-FY22F earnings are unchanged, which are 8%-19% below consensus, following the online conference with Axiata’s investor relations team yesterday. These are the salient highlights of the conference:

• Cellular operators (celcos) in countries which experienced stricter lockdown measures will have a higher prepaid revenue impact due to the closures of physical reload centres for prepaid users. Other factors impacting celco revenues are the proportion of remittances/tourism and mobile revenues to GDP, workers in informal economy, dual sim penetration, prepaid connections, affordable fixed service substitutions and CSRmandated free data during lockdowns.

• Management’s blended risk scoring shows Indonesia and Bangladesh with the least impact within the group vs highly vulnerable Nepal, while Malaysia, Cambodia and Sri Lanka has mid-to-high rating (See Exhibit 1).

• As Digi.Com’s recent results showed under the movement control order, even postpaid subscribers, which have grace period for extended payments, could decline due to involuntary churn and automatic termination. This could be exacerbated by Celcom’s delayed product launches and prepaid to postpaid migration programmes before the onset of Covid-19 this year.

• Assigning Digi’s 5% QoQ decline in 2QFY20 service revenue with a risk score of 3 vs Axiata’s weighted risk average of 3.1, we estimate that Axiata’s service revenue and pretax profit could likewise decrease by 5%. However, the bottomline could be eroded further by higher credit costs and operating expenses.

• Even though Digi has launched entry level prepaid plans at RM15/month, half the sector’s average revenue per user, Axiata views its current RM35 plan for unlimited mobile data as competitive in the market. As price/GB is expected to decline in tandem with the worldwide trajectory, the group aims to reduce cost/GB while sustaining margins and network capability.

• Focus on cash and liquidity by cutting FY20F costs by and additional RM0.9bil above current optimisation programme and 15% capex deferment.

• Axiata plans to mitigate the Covid-19 impact by expanding fixed wireless services, focusing on enterprise and businesses while providing digitalised distribution and customer care. However, Celcom does not appear to have any plans to launch fibre services in Peninsular Malaysia at this juncture

Source: AmInvest Research - 17 Jul 2020