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 forecasts are maintained following an analyst briefing today. These are the salient highlights:

• While Axiata has not reinstated its withdrawn FY20F guidance, management affirmed expectations for a low single-digit decline in revenue and EBITDA while capex could be slightly lower than the RM6.2bil spent in FY19.

• The group’s FY20F effective tax rate is likely to range 40%–45% due to group deferred taxation and higher corporate rates in Bangladesh for mobile operators.

• To mitigate the risks of the US ban on Huawei products, the group is reviewing its vendor strategy and delayering software and hardware systems, moving towards virtualisation and adopt a more open architecture to accommodate different suppliers. Huawei has assured Axiata that its chip inventory is able to last a year, providing some comfort for the maintenance of existing systems.

• Management believes the group is a year ahead in achieving its RM5bil cost-savings programme which had been earlier targeted for 2017–2021. This is likely to provide support to the group’s 2HFY20 earnings.

• The recent issuance of US$1.5bil new debt via US$500mil sukuk and US$1bil Euro medium-term note will reduce interest costs by 0.7ppt, effectively reducing finance costs by RM60mil annually while raising the group’s fixed rate borrowings to 87% from 66% and extending overall tenure by 2.6 years to 16 years.

• Management views that consolidation amongst players in the sector is inevitable in Indonesia and Malaysia given the intense competition, costly spectrum renewal requirements and capex intensity, as we had highlighted in our Thematic Report on 11 August 2020. However, the group expects that these activities could be earlier in Indonesia due to the regulators’ policies.

• Axiata is positioning to be a dividend yield company over the next 3–5 years vs. a growth story in emerging markets given the rising level of competition regionally and investor expectations. This could mean more corporate developments as the group will need to monetise its multiple undervalued businesses and cut the group’s high net debt/EBITDA of 1.6x.

• 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 FY20F EV/EBITDA of 4.4x vs. Maxis' 12x

Source: AmInvest Research - 28 Aug 2020