We attended Axiata’s analyst day yesterday and walked away with a NEUTRAL view. The key highlight of the briefing was its long-term strategy, where Axiata continues to believe that data and digital services will be its key earnings driver going forward. Management also provided some updates on its transformation journey as well as its growth strategy in its key operating companies (OpCos). Celcom, meanwhile, will resume its active path and reintroduce several new products/services in 4Q14 after lying low for the past 11 months. There is no change in our FY14-FY15 earnings forecasts. We reiterate our MARKET PERFORM rating on Axiata with an unchanged target price of RM6.92, based on a targeted FY15 EV/forward EBITDA of 9.1x (+1.0x SD above its 4-year mean).
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 key growth area. The group’s data revenue accounted for c.18% (as a percentage to the group’s total turnover) in 1H14 from 15% recorded at end-CY13. Data revenue is expected to continue to climb given that the group’s smartphone penetration rate is still at the growing stage where Celcom only recorded 37% in 2QCY14, XL (21%), Dialog (20%) and Robi (8%) in contrast to the mature markets (i.e. Australia, Singapore; Korea and US) of between 56%-73%. Axiata believes that ARPU will tend to improve with increasing mobile penetration rate coupled with higher data usage on the back of better network quality and higher speed, thus suggesting rooms for earnings growth going forward.
Expecting a stronger 2015 operationally, where Axiata believes it could benefit from: (i) a better network coverage/capacity, stronger customer relationship management, as well as more solid customer experience at Celcom, (ii) full-year benefits from Axis acquisition & stronger balance sheet at XL, and (iii) continued operational capability in other OpCos. Competition, regulatory and forex, however, remain fairly unpredictable.
Beyond 2015, the group is targeting to focus on six strategic areas which include transforming and expanding its core businesses (to, for example, convergence & digital businesses), financial efficiency and develop a balanced & robust portfolio (i.e. in-country consolidation for leadership). The aim is to transform into a very efficient organisation with distinct competitive advantages. Meanwhile, the group also expect to improve its dividend proposition to shareholders by 2020 or even much earlier.
Celcom – firing on all cylinders in 4Q14. With the recent completion of its business support services (BSS) transformation (mainly in its IT system upgrading), Celcom has scheduled to launch several new products/packages in 4Q14 (Figure 1 & 2) after an 11-month window of no product launches. Management believes its new products are ahead of the curve in view of the benefits (Figure 3) delivered post the completion of BSS. As part of the new products' launching and its priority tasks in 4Q14 also include: (i) regaining dealers' confidence and (ii) improve trade efficiency (Figure 4).
XL – significant integration milestones achieved (c.60% OPEX reduction) to date, including technical integration, commercial integration and HR rationalization. Further reduction (i.e. on spectrum licence fees, leases termination, equipment re-use) is expected once network integration is completed by end-CY14. We understand that the group had earlier estimated to save c.USD200m in 2G investment over the short-term and another c.USD200m over the medium term in 3G investment.
Potential threat from Telekom Malaysia (TM) over the medium-term. Axiata is not overly concerned on the partnership and collaboration agreement between TM, Green Packet and Korea-based SK Telecom in the short-term but is expected to face some threats over the medium-term should TM provides mobile voice and SMS services. Nevertheless, management believes there are still rooms for collaborations in view of the different strengths and key targeted segments by both companies. We understand that Celcom is targeting to launch a new HSBB home convergence service (with TM) in December 2014.
Edotco, Axiata’s telco tower company, currently operates 12.7k telco towers across its OpCos (except Indonesia) with a tenancy ratio of c. 1.3x-1.4x. Moving forward into year 2015, its key focus includes: (i) increasing tenancies and colocations, (ii) enhancing operational efficiency and customer satisfaction, and (iii) optimising tower capex across the region by design as well as renewed RFPs. Management believes there is a likelihood Edotco may seek for funding from the capital market by 2016-2017.
Source: Kenanga
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