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 pending the completion of the proposed IPO of the group’s 68.7%-owned Robi Axiata (Robi) in Bangladesh, which will drop to 61.8% after its listing.
• For now, the Bangladesh Securities and Exchange Commission has approved the proposed IPO and listing of Robi Axiata on the Dhaka and Chittagong Stock Exchanges following an application on 21 February this year.
• Following the merger with AirTel on 16 November 2016, Robi is currently the second largest telecommunications operator in Bangladesh with a subscriber base of 48mil vs. Grameenphone’s 74.5mil.
• Robi first commenced operation in 1997 as Telekom Malaysia International (Bangladesh) under the brand name Aktel, which was subsequently rebranded to Robi in 2010. After the merger with AirTel in 2016, Robi uses both the Robi and Airtel brands, deployed on the 900MHz, 1800MHz and 2100MHz bands.
• Following the merger with Airtel, Robi registered losses in FY16–FY18 but turned around to a FY19 net profit of RM37mil on cost optimisation. The company still posted a 1HFY20 net profit of RM26mil on flattish revenue during a Covid-19 lockdown in the country vs. a loss of RM18mil in 1HFY19.
• While we are positive on the group’s plans to monetise its assets, investor sentiments for an IPO at this juncture may be subdued given Bangladesh’s onerous tax regime and negative policies towards mobile operators.
• The country’s regulators have raised the corporate tax rate for mobile operators to 45% this year from 30%. Also, its Finance Minister has proposed increasing the supplementary duty on the usage of SIM/RIM card from 10% to 15%.
• With the new tax rate, customers will have to pay up to 33% for mobile phone use. Currently the services carry VAT of 15%, supplementary duty of 10% and surcharge of 1%. Additionally, customs duties on handsets are imposed at 10% and SIM cards at 25%, while base stations and network equipment range from 5% to 25%.
• Even worse, the regulator claims the operators owe unpaid taxes with multiple claims on Robi dating back to 2007. From Axiata’s results announcement, we estimate that those unresolved legal claims could amount to BDT26bil (RM1.3bil) – 30% of our valuation of Robi in our SOP.
• With the legal disputes occurring over the past 5 years, the Bangladesh Telecommunication Regulatory Commission (BTRC) has occasionally threatened to cancel the operators’ mobile licences for non-payment and temporarily reducing their bandwidth. While telco operators have been able to mitigate such demands through legal means, media reports reveal that they continue to face a suspension of receiving the certificates required to import equipment and software as well as restrictions on seeking approval for new tariff and service plans.
• Besides unlocking Robi’s value, Axiata plans to utilise the proceeds of RM255mil from the new issuance of 10% of Robi’s shares to fund its capex, tap into a wider capital market and benefit from a corporate tax reduction of 5% for listed entities.
• With management looking at a listing by 4QFY20, we view this development as part of Axiata’s longer term strategy to transition into a dividend yield company over the next 3–5 years vs. growth story in emerging markets given the rising level of competition regionally and investor expectations. This could mean other 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 currently.
• Robi accounts for 14% of Axiata’s 1HFY20 EBITDA but only 6% of SOP due to the impact of minority interests on multiple subsidiaries. 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.

Source: AmInvest Research - 25 Sept 2020