Investment Highlights

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

• The themes reverberating from Axiata’s Analyst & Investor Day online conference yesterday were the likelihood of near-term rerating catalysts from industry consolidation and doubling of dividends from organic growth driven by asset optimisation, cost reduction and reprioritising investment portfolios for shorter payback returns.

• These are the salient highlights for Axiata’s target by 2024 with a vision to be the “Next Generation Digital Champion”:
  • The group will cut its cost/GB by 75% to below 10 sen from 60 sen in FY19 while raising group EBIT margin to above 20% from 14% in FY19 and dividend/share over 20 sen from 9.5 sen in FY19.
  • This will entail a normalised PATAMI of over RM1.8bil – 50% above our FY22F earnings. The assumptions are based on revenue growth of over RM6bil, reduction of opex growth by over RM3bil, cut depreciation and amortisation by RM1bil, decrease financing cost by over RM100mil and cap the ratio of mobile capex to revenue to below 20%.
  • In contrast to expectations of low single-digit growth for consumer mobile over the next 4 years due to the intense competition, management is projecting that the stronger revenue growth will be propelled by the enterprise (low % teens), tower infrastructure (low % teens), home (+40%) and digital (+50%) businesses.
  • Cost savings of RM3bil–RM4bil from virtual centralisation of a “Collective Brain” of operating companies (opco) leaders making group-wide decisions on IT, resources, procurement and end-to-end decisions. Of this, 60% of the savings will stem from network, 30% from procurement and 10% from IT.

Since FY17, Axiata has reduced both capex and opex by RM5.3bil with RM1.1bil expected in FY20F. For FY20F, savings from network, IT and procurement is projected to reach RM600mil.

• The cost reduction programme will be partly aided by the lowering cost of debt by 0.7 ppt to 3.3% from the bond issue of US$1.5bil in August this year, translating to interest savings of RM60mil annually while extending average loan tenure from 2.6 years to 16 years.
• Almost all the opcos will be revising dividend payout policies to a minimum 50% with the intention to reach 100%, subject to operating free cash flow. The only exception will be 63%- owned edotco, which will need to fund its tower footprint expansion with a lower minimum dividend payout ratio of 25%.
• Management views consolidation as likely in Malaysia, Indonesia and Bangladesh which could mean collaborative alliances on resources or a business merger given the intense competition, high capex for 5G rollouts and spectrum acquisitions coupled with regulatory challenges from Covid-19-stricken regional countries.

This is not a surprise as management had earlier viewed that consolidation amongst players in the sector is inevitable in Indonesia and Malaysia as highlighted in our thematic update on 11 August 2020. Management revealed that the operators are currently in discussion amongst themselves.

Besides monetising edotco and Axiata Digital Services’ investments, management hinted of a possibility of an IPO for Celcom, given that the group views, as we do, that it is currently grossly undervalued as compared with its local peers.

• For a regional telco operator with excellent opportunities to further unlock its under-valued assets and engage in merger and acquisition activities, Axiata currently trades at a bargain FY21F EV/EBITDA of 4x vs. Maxis' 12x. This is even more compelling given Axiata’s 3-star rating for ESG compliance on the FTSE4GOOD INDEX.

Source: AmInvest Research - 4 Dec 2020