Investment Highlights

• We maintain HOLD on Axiata Group (Axiata) with an unchanged SOP-based fair value (FV) of RM3.00/share, which implies FY24F EV/EBITDA of 6.3x - at parity to the 5-year median. We have a neutral 3-star ESG rating for Axiata.
   
• Key takeaways from the analyst briefing yesterday are as follows:
   
  • Group borrowings grew 2.8% QoQ to RM26bil in 1QFY24, where a big chunk of the increase was attributed to higher forex translation from the appreciation of USD.
     
  • The recapitalisation exercise to monetise Axiata’s 63% stake in Edotco is under review as valuations are unattractive currently. Nevertheless, management assured that edotco’s businesses in the frontier markets are self-sustaining.
     
  • edotco’s Myanmar exit is pending regulatory approval, which may come within 6 to 12 months i.e. Sept 2024 to March 2025. Management affirmed that all provisions for the exit have already been provided in past results.
     
  • The Dialog-Airtel merger is pending shareholders’ approval, which is expected to come by 13 June 2024 while regulatory approval is envisaged to be obtained by 2QFY24.
     
• Review of performance for key operating companies (OpCos):
   
  • XL Axiata (Indonesia) – Reached an all-time high ARPU of IDR44k (+10%) on the back of a higher revenue (+12% YoY). This was thanks to improved contribution from data and digital services, coupled with cost savings.
     
  • Dialog (Sri Lanka) – Revenue dropped 14% YoY to LKR43mil in 1QFY24 due to lower hubbing contribution. This can be attributed to Dialog’s conscious decision to pivot away from low margin business. PATAMI fell by 68% YoY, dragged by smaller forex gains and higher interest expenses.
     
  • Robi (Bangladesh) – Strong subscriber growth (+5% YoY) drove the 7% YoY revenue increase. PATAMI surged over 100% to BDT 1.1bil, supported by lower forex losses and continuous cost optimisation efforts.
     
  • LinkNet (Indonesia) – EBITDA improved by 3.4%, supported by a cost optimisation exercise. YoY, revenue fell 6.7% due to lower residential and enterprise revenue. The transition to FibreCo raised D&A and net finance expenses, resulting in an 86.3% decline in PATAMI.
     
  • edotco – Revenue grew by 7.2% due to contribution from Bangladesh, Cambodia and the Philippines.
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  • Boost– YoY revenue grew by 9%, driven by Boost Credit and Boost Connect. Losses declined to RM43mil in 1QFY24 from RM52mil in 1QFY23 due to lower marketing and staff costs. Boost Life users increased 6% YoY and 7% YoY for Malaysian merchants.
     
  • ADA– Revenue surged 59% YoY, driven by growth in Ecommerce, Customer Engagement, and Data & AI. PATAMI also rose by over 100%, boosted by higher net interest income and forex gains.
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• We remain neutral on Axiata’s outlook post-analyst briefing. We think Axiata’s prospects remain challenging in an elevated interest rate environment, coupled with strong US currency. To note, Axiata Group has 64% exposure to unhedged foreign borrowings in 1QFY24, mainly from Axiata’s 30-year EMTN, edotco’s term loan, dollar- denominated debt owned by Dialog Sri Lanka and Robi Bangladesh.

• Looking forward, we are cautious on Axiata’s prospects. The group may be affected by i) potentially large spectrum investments in Indonesia and Bangladesh, ii) digital banking losses, and iii) higher interest expense arising from additional debt financing for Link Net’s fibre rollout.

• We believe that Axiata is fairly valued as it is currently trading at 6x EV/EBITDA, near its 5-year historical mean.

Source: AmInvest Research - 31 May 2024