Investment Highlights

• We maintain our BUY call on Axiata Group (Axiata) with unchanged forecasts and sum-of-parts-based fair value of 6.30/share, on expectations of a value-enhancing re-merger with TM which could reduce the valuation differential with its peers and re-energise its earnings prospects. This may be a longer term possibility amidst the sensitivities inherent in Axiata’s foreign exposure in operations and top management talent.

• We attended Axiata’s Analyst and Investor Day yesterday. These were the key takeaways:

• The group unveiled its revamped triple core focus on convergence and digitalisation under Telco 3.0, new digital businesses and tower infrastructure.

• Convergence means Axiata will focus only on operations that are ranked No. 1 or strong 2, or have a clear path of reaching that level in their respective countries. While this may mean no new mobile footprint regionally, the group’s 28.5% stake in SGX-listed M1 could again be open for sale next year as part of its exit/monetisation route.

• The convergence strategy will be deployed in all operational companies regionally with fixed wireless, which may involve fibre-to-the-home (FTTH) proposition in its overseas markets.

• Consolidation via mergers and acquisitions may involve key markets in Malaysia, India, Sri Lanka and Bangladesh. The group’s 20%-owned Idea’s merger with Vodafone will lead to India’s second largest mobile operation by March 2018.

• edotco, the 8th largest global tower company and 2nd largest multi-national tower company with 40,000 sites owned and managed, will continue to grow organically and via acquisitions.
• Focus on cost optimisation, which also involves proceeding with its core digitalisation and optimising the group’s capital structure with a savings/avoidance target of RM5bil from 2017-2021.
• Digital platforms, which were experimental in the past, will now be focused on financial services, media/entertainment/advert, enterprise/IoT and application programming interface (API) platforms.

• Rising regulatory risks such as SIM registration confusion in Indonesia, sector-specific discriminatory taxes in Sri Lanka and Bangladesh, bias for government-related operators like Telkomsel in Indonesia and Sri Lanka Telecom. Also, additional spectrum fees will have to be paid in Malaysia, Bangladesh and Nepal.

• Global challenge of successfully launching digital platforms against established over-the-top (OTT) players such as Apple Pay, Samsung Pay and Ali Baba while governments attempt to level the digital playing field with taxation and content control.

• Axiata currently trades at a bargain FY18F EV/EBITDA of 7x, way below its 2-year average of 8.1x vs SingTel’s 14x.

Source: AmInvest Research - 29 Nov 2017