We believe Axiata's new dividend policy will not match DiGi.Com Bhd's of 80% and Maxis Bhd's of 75% due to (i) funds needed for capex to fund its operating companies (OpCo) growth in developing markets; and (ii) its focus as a growth stock rather than a dividend yield stock. We expect Axiata to pay out 15% of its FY2010 EPS and subsequently adopt a dividend payout of 30%, which translates to a yield of about 3% in line with the FBM KLCI dividend yield.

Low mobile penetration rate (less than 100%) coupled with huge population exposure in its OpCo should propel Axiata's current subscriber base of 129.7 million to 137.5 million and 152 million in FY2010 and FY2011 respectively. We also expect Axiata to benefit from the strong brand names of its various OpCo, reflected by their market position in the various countries.

Axiata's earnings before interest, tax, depreciation and amortisation (Ebitda) margin is poised to improve gradually from 39.3% in FY2009 to 44 % in FY2010 with margins to remain at 44% in FY2011 and FY2012. Our positive view on Axiata's Ebitda margin is due to its active network efficiency programmes, cost optimisation and customer retention programmes which are executed across OpCo. We draw comfort that each OpCo in Axiata has a specific strategy to optimise margins. We believe that the lessons learned from implementing such strategies will be shared across the OpCo thus benefitting Axiata.

We see the MoU signed between DiGi and Celcom Axiata focusing on three collaborative areas, that is operations and maintenance; transmission and site sharing; and radio access network; as a positive step forward in the industry. The proposed active sharing model should elevate both Celcom Axiata and DiGi's Ebitda margins which are already lagging behind Maxis. We foresee that Celcom's Ebitda margin will hit 45.5% in FY2010 (FY2009: 44.6%) following strong initiatives in cost reduction. Our Ebitda margin does not include the impact of the network sharing as a more definite agreement will only be presented by end-CY2010. We expect network sharing to be the trend moving forward in order to boost cellular operators' Ebitda margins.

With a cash balance of RM2.8 billion (1QFY2010) and an expected Ebitda of RM6.7 billion, Axiata should be comfortable enough to generate internally its expected capital expenditure of RM3.6 billion, out of which RM1 billion is for Celcom. With the sale of XL shares, Axiata's cash balance should balloon to above RM4 billion. The issuance of RM4.2 billion in sukuk with a tenure of five years, seven years and 10 years should provide some breathing room to its cash usage as it will be used to refinance its existing debt, which is due to mature in two years, and at the same time hedge its position against increasing rates.

We expect the lowering of the mobile termination rates (MTR) and fixed termination rates (FTR) by 40.2% and 17.6% respectively to five sen/min will lower Axiata's bottom line by less than 1%. The impact on Celcom, which contributes to 48% of Axiata's 1QFY2010 Patami is expected to be minimal with its position as the second largest mobile operator in Malaysia. We expect savings from outgoing interconnect will not be sufficient to offset the lower incoming interconnect revenue from other operators. ? Inter-Pacific Research, July 14

This article appeared in The Edge Financial Daily, July 15, 2010.