Update

We attended Axiata’s annual Analyst and Investor Day last week and came away reassured of its future prospects despite facing some challenges.

• Financial outlook – Axiata expects FY23 underlying PATAMI to be lower due to integration costs incurred by the merger between Celcom and Digi. The management noted that its dividend target of 20 Sen  dividend by 2024 is not achievable after being derailed by Covid-19 in the past two years and hopes to achieve this target by 2027. The management also plans to lower gross debt/EBITRA to 2.5x by 2025  from 3.19x in 3Q22. 

• After a slew of M&A this year (Edotco tower, LinkNet and CelcomDigi), Axiata aims to transform itself from a Telco to a Techco via asset delayering in the next 3 years. 

In view of the macroeconomic headwinds with global inflation and  interest rate hikes, the Operating Companies have taken mitigation  steps as below:

• Dialog (Sri Lanka) – Facing economic crisis with currency depreciation and inflation, Dialog attacked the market and has grown  5 times against its closest competitor. As the market leader with over  50% market share, Dialog raised its prices while locking in high ARPU  customers. In its cost reduction efforts, Dialog accelerated its network modernisation by shutting down the 3G network earlier than planned.  Dialog also migrated to e-billing and ended paper billing to save paper usage. To save energy, Dialog embarked on solarisation of one-third of sites due to frequent power cuts in the country. On its capex of  U$150m, Dialog aims to cut one third of its capex using AI, analytics,  and digitisation.

• Robi (Bangladesh) – Bogged currency depreciation and low margins, Robi embarked on improving asset monetization by pushing  Voice revenue with higher margins. It also passed on VAT increase to customers and raised prices 5 times in the midst of inflation. As the currency depreciated 20%, Robi convert its short-term debt to long term debt to shield itself from currency fluctuations.

• Ncell (Nepal) embarked on cash preservation and focused on current area coverage and quality network rather than a wide network. It also aims to lower churn rate and drive higher value customers. 

• Smart (Cambodia) – Smart was not impacted by the US dollar appreciation as the USD is widely used in Cambodia. However, Smart is affected by inflation and it had to balance between monetisation and affordability. Smart then looked at its customer behaviour for capital allocation and invested in suburban and rural areas based on human traffic. It is also investing in the fixed broadband market, where penetration is low currently. Smart is also pushing its e-top ups to its prepaid customers, which save costs compared to physical top ups.

• Boost – The e-wallet, which is still loss making (-RM149m in 9M22),  aims to improve profitability by evolving from a payment business into  lending business after receiving its Digital Banking license with its partner RHB in April. Boost to expand its digital financing and banking services to merchants and SMEs. Its current blended NPL is below  3%.

• XL (Indonesia) - Capex has been high around IDR9 trillion in 2021  and 2022. XL expects capex to normalize below current levels and is ready to monetiation. The management noted that capex will increase in the future during the next cycle when rolling out 5G. Linknet remains listed on the Jakarta stock exchange despite Axiata owning  99.5%. The management noted that there will be no merger between  XL and LinkNet and will focus on synergies between the two companies by offering bundled products, cross selling, combined distribution and sales channel as well as sharing infrastructures such as backbone, submarine and fiber. 

Earnings Outlook/Revision 

• Forecast adjusted – We are adjusting our FY22 – FY24 figures to account for the merger of Celcom and Digi effective 1st December  2022 by removing the revenue portion of Celcom and including 33.1%  of share of profits from the MergedCo.

• We are slashing our revenue forecasts for FY22 – FY24 by 2%, 25%  and 25% respectively while EPS estimates are reduced by 6%, 31% and 16% respectively where FY23 earnings are expected to be severely impacted by integration costs.

Valuation & Recommendation

• Maintain BUY with a higher target price of RM4.02 (previously  RM3.65) based on Sum-Of-Parts (SOP) after accounting for the Celcom-Digi merger and higher stake in LinkNet.

• Caution ahead – Going forward, the management is cautious on macroeconomic challenges that could impact its outlook such as Global inflationary pressures, higher interest rates, currency volatility,  and regulatory risks.  

Source: JF Apex Securities Research - 7 Dec 2022