■ Upgrade call on Axiata from Hold to Add post share price decline and higher EBITDA estimates. Change in tone towards monetisation adds to upside.

■ Deconsolidation of edotco is the biggest opportunity to remove balance sheet constraints and unlock shareholder value, in our view.

■ EV/EBITDA-based target price raised to RM3.07 (prev. RM2.90) on EBITDA increases. RNAV valuation of RM5.60/share sets the goal in the long run.

Change in tone in favour of monetisation sets the ball rolling

Management’s shift in tone towards asset monetisation represents a key change for Axiata, in our view. While included in management’s “Opportunities” slide since the 4Q22 results presentation in Feb 2023, its tone on monetising assets has since changed, in our view. Axiata seemed more willing to discuss the topic at its 2Q23 results call and in subsequent conference calls we hosted for investors with management. As we noted in our report of 18 May 2023, monetising its assets would be a key rerating catalyst, especially as earnings visibility is complicated by its numerous operating subsidiaries, each subject to differing operating, macroeconomic and regulatory environments.

Edotco the obvious opportunity

We believe 63%-owned infrastructure asset, edotco, presents the key monetisation opportunity for Axiata. We understand demand amongst private equity (PE) for such assets remains healthy, and more importantly edotco is sizeable (31%) within our RNAV estimate for Axiata. Our valuation for edotco is based on a 15x FY24F EV/EBITDA, which compares to 16x for global peers, while Indonesian listed tower companies under our coverage trade on 10.2x FY24F EV/EBITDA. While the elevated global interest rate environment may curtail multiples, we believe that at Axiata’s current price, the market is not factoring in a fair market, let alone an M&A type multiple on edotco within Axiata. We are cognisant that M&A transactions require more than just willing buyers and sellers, with all important terms and conditions of how a target asset is managed going forward, often being a failing point. As such, we are not factoring in a transaction in our target price, for now.

Upgrade from Hold to Add; higher target price of RM3.07

We upgrade our call on Axiata from Hold to Add as 1) we see a noticeable change in tone towards asset monetisation, which could reduce its 57% discount to our estimated RNAV of RM5.60/sh (see Fig 1), 2) following an 18% correction in share price YTD (now down 49% over the past 5 years), and 3) a 5% increase in EBITDA has lifted our EV/EBITDA based (5.7x based on -1s.d. post-NCell acquisition in 2016) target price from RM2.90 to RM3.07, providing a 24% share price upside potential. A 4% dividend yield, meanwhile, provides downside support, in our view. The key downside risks would be 1) regulatory/macroeconomic risks in its key operating markets impacting costs/cashflows 2) further legal losses in Nepal, and 3) higher interest rates raising finance costs.

Source: CGS-CIMB Research - 25 Sep 2023