We attended Axiata’s analyst day yesterday. The key highlights of the briefing were its long-term strategy, where Axiata continues to believe that data and digital services coupled with in-country consolidation will be its key earnings driver going forward. Management also provided some updates on its transformation journey as well as its growth strategy and key industry challenges. There is no change in our FY13-FY14 earnings forecasts for now. We reiterate our MARKET PERFORM rating on Axiata with an unchanged target price of RM6.70, based on a targeted FY14 EV/forward EBITDA of 8.5x (+1.0x SD).

Data services remain its key focus. The group’s future revenue growth opportunities are very much dependent on its data services where Axiata continues to believe that data services will be its next growth area when the data universal eco system (such as devices, networks and applications) improves. Meanwhile, with low fixed-line penetration in most of its OpCos markets, Axiata is well positioned to provide high-quality data services, in particular, to small and mid-screen connections. The group’s smartphone penetration rate is still in the growing stage where Celcom has only recorded 27.5% in 2QCY13; XL (16.4%); Dialog (16.3%) and Robi (5.9%) in contrast to the mature markets (i.e. Australia, Singapore; Korea and US) of between 48%-61%. Axiata believes that ARPU will tend to improve with increasing mobile penetration rate, thus providing rooms for earnings growth going forward.

Beyond voice, Axiata’s transformation journey. Axiata is currently in the midst of its phase 2/3 (2011-2015) transformation journey where the group is aiming to build a new-generation telecommunication company beyond voice and SMS. The current transformation is focusing on protecting and sustaining its core businesses whilst venturing aggressively into new business areas such as data and digital services. Meanwhile, the group aims to enter into the phase 4 transformation in 2016-2020 period to build a sustainable and profitable growth company.

Growth strategy. The group segregated its growth strategy to three key areas namely, (i) New Approach, where transform the ‘traditional core’ business to digitalisation will be its key focus, (ii) New Services, where Axiata will invest aggressively in data services and moderately in digital services, and (iii) New Asset, where the group will continue to pursue in country consolidation, small investment in digital services, while cautiously and opportunistically pursuing a new footprint within the region.

Key strategies and seven focus areas. In order to achieve its growth strategy, the group plans to focus on the following seven areas over the next two years: (i) mobility-centric lifestyle services/multi-play, (ii) healthy competition within the industry, (iii) cost structure improvements, (iv) micro-analytics to enhance effectiveness, (v) prudent financial policies and balance sheet optimisation, (vi) relentless focus on increasing yield and rationalizing capex across the group, and (vii) transform into a digital organization.

Key industry challenges. Axiata is mindful of both external and internal challenges in the mobile industry which are ahead on many fronts, such as economic circumstances, competitive environment (i.e. pricing and cost management), regulatory changes (i.e. spectrums and regulation issues) and industry evolution (i.e. data play and OTT cannibalisation). Nevertheless, the group remains optimistic to sail through the challenges and capitalise on them given its strong management team, operational capabilities, financial resilience as well as enhancing network assets.

Source: Kenanga