Investment Highlights

• We maintain our BUY call on Axiata Group (Axiata) with an unchanged sum-of-parts (SOP) 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 SOP valuation, which is partly based on EV/EBITDA for the group’s regional operations, is retained for now despite lower interest cost and depreciation charge assumptions.
• The Star reported that Axiata’s deputy group chief executive offer Datuk Izzaddin Idris said that the group plans to raise US$1bil (RM4.2bil) worth of sukuk to reduce its borrowing costs given the current low interest rate environment.
• The sukuk will be issued in tranches with tenures of 10 years, 20 years and 30 years, with the lead arrangers being CIMB Bank, Standard Chartered, UBS Bank and Citibank.
• This fresh refinancing exercise will account for 23% of the group’s FY20F gross debt of RM18.5bil, earmarked to retire some of Axiata’s debt and working capital for its subsidiaries.
• Additionally, Izzaddin said that Axiata plans to utilise only 85% of its planned capex for this year, which was earlier indicated to be RM6.6bil. We estimate that the group’s FY20F capex/service revenue ratio will drop to 23% from 26%.
• With these developments, we have raised Axiata’s FY21F– FY22F earnings by 7%–8% based on the assumption of a 1- percentage-point reduction in interest cost for the partial refinancing of the group’s debts, together with lower depreciation charges following the FY20F capex reduction of 15% to RM5.5bil.
• Given the group’s huge loan base, the interest cost reduction will have a more significant earnings accretive impact compared with the lower depreciation charges.
• For FY20F earnings, the impact is a slight 3% increase given the proportionately lower interest cost impact with the refinancing exercise expected to be completed by next month.
• For a regional telco operator with excellent opportunities to further monetise its assets and engage in merger and acquisition activities, Axiata currently trades at a bargain FY21F EV/EBITDA of 4x vs. Maxis' 12x. Axiata Group 30

Source: AmInvest Research - 30 Jul 2020