Investment Highlights

• We maintain our BUY call on Axiata Group (Axiata) with an unchanged sum-of-parts-based fair value of RM6.60/share, which translates to an FY19F EV/EBITDA of 6.5x, half of Singapore Telecommunications (SingTel). Our valuation is premised on a potential value-enhancing re-merger with TM which could optimise synergies while narrowing the valuation differential with peers and re-catalysing its earnings prospects.

• Following a teleconference yesterday which guided for moderate growth in earnings and dividends, we have lowered Axiata’s FY18F-FY20F earnings by 12%-17% due to: i) lowering XL Axiata’s IDR forex rate by 9% to IDR3,500=RM1 and ii) Raising effective tax rate by 3%-point to 28%.

• Axiata remains focused on its triple-core strategy which involves:

• Telco 3.0 convergence and digitisation initiative to strengthen its existing core operational performance to at least a strong second ranking via cost optimisation, enhancing network and IT platforms while consolidating its main businesses;

• doubling down in new core digital businesses in financial services, media/entertainment/advertising, enterprise/ internet of things and platform companies which support or leverage on Telco 3.0; and

• organic and inorganic growth for infrastructure divisions such as edotco and network companies. ? This strategy involves monetisation of its core business operations or exit of non-core divisions. However, management is unable to provide any clear time-line yet for the listing of edotco or its digital businesses.

• The group’s cost optimisation has a target of RM1bil cost savings for opex and capex over the next 5 years vs RM1.3bil in FY17. This is needed to mitigate the expected EBITDA margin squeeze from lower data yields amid a highly competitive mobile sector.

• Recall that Axiata is expected to incur potential loss of RM241mil, 20% of the group’s FY18F earnings, from the placement of 424mil Idea Cellular (Idea) shares at an issue price of INR82.50/share worth INR35bil to eligible qualified institutional buyers. This placement will dilute Axiata’s stake in India-based Idea from 18% to 16%. Idea currently accounts for 6% of Axiata’s SOP.

• Additionally, the group will be further providing a RM1.2bilRM1.8bil non-cash impairment upon completion of the impending Idea-Vodafone merger by 1HFY18, which could translate to a FY18F loss.

• While this will cut the carrying value of its stake in Idea by 30% to RM4.5bil, these impairments should not have any substantive impact to the group’s FY18F normalised earnings, which excludes provisions. Hence, we are neutral on this upcoming development, which is unlikely to impact the group’s dividend paying capability.

• The group will be reviewing its investments including 29%- owned SGX-listed M1 while Axiata’s stake in Idea could drop below 10% following its merger with Vodafone. 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 - 4 Apr 2018