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 outlined tactics to achieve various goals by year 2020. Meanwhile, management also provided some updates on its transformation journey as well as its growth strategy in its key operating companies. There is no change in our FY15-FY16 earnings forecasts. We reiterate our MARKET PERFORM rating on Axiata with an unchanged target price of RM6.05, based on a targeted FY16 EV/forward EBITDA of 8.6x (representing a 4-year mean).

Long-term strategy to year 2020. As Axiata is approaching the end of its Phase 2 transformation journey to become a regional champion in 2015, it shared its forward long-term strategy to year 2020. These include: (i) building firm foundation for the future with substantial investments in new technology and capacity to accommodate the rapid demand for data, (ii) accelerating its execution of new businesses with edotco and digital services through M&As, and (iii) continuing to invest, transform and expand its core businesses through in-country consolidation and achieve a more balanced portfolio in the medium-term. All in all, Axiata intends to achieve a low-to-mid single digit revenue growth with a moderate dividend yield of c.3% over the medium-term.

Capex strategy in 2016. Axiata is likely to keep its capex spending in the range of RM4-5b (FY15: RM4.8b) with key focuses on strengthening its data network in all its Opcos. 4G investments remained the limelight for Celcom and XL while strengthening the 3G network is a priority task for Robi and Smart. Meanwhile, Dialog’s capex will continue to spend on widening its 3G & 4G investments.

Celcom and XL’s transformation progress. Celcom indicated that its IT transformation issues have been predominantly resolved and are gradually regaining trade confidence. The system is expected to enable stabilisation and allow the group to provide seamless configuration of products across IT and network as well as improving product’s time-to-market from 1Q16 onwards. XL, on the other hand, highlighted that its transformation plan has continued to gain momentum with revenue and EBITDA margin set to improve further on the quarterly basis in 3Q15. Note that, the group has unveiled its 3-year business transformation journey in April, which shifts its business model to profitability-centric from the high subscribers’ growth model previously.

Strengthening XL’s balance sheet. XL is taking proactive steps to address its unhedged external USD debt prior to 3Q15 results release via early repayment of USD debt or refinance to IDR. In September, the group has made early repayments of a total USD150m loan and refinance USD180m loan to IDR with the balance of USD 260m unhedged debt likely to be settled (through similar methodologies) prior to end-November.

Edotco – aiming to become the world’s top 10 telco tower operator by year 2020. Axiata shared more colours with regards of its recently proposed acquisition in Myanmar, where edotco (a wholly-owned subsidiary of Axiata) plans to buy a 75% stake in Myanmar Tower Company (MTC) from Digicel Group. MTC currently owns and operates 1,250 towers (largely ground base, and accounted for c.12%-15% market share) with Ooredoo as an anchor tenant in all towers. Post completion, edotco’s tower portfolio will be expanded by another 8.5% to 15,962 towers. Moving forward, edotco is set to become the world’s top 10 tower operator by year 2020 after expanding its tower portfolio to 20k-25k towers.

More war chests to fund future acquisitions. Management is feeling comfortable with an optimal capital structure of 2.5x gross debt/EBITDA level (vs. 2.0-2.2x earlier), suggesting that the group still have more room (or c. RM3.2b) to gear up for future expansion. Note that, Axiata recorded a cash balance of RM5.4b and RM14.0b in debts as of end 1H15, translating into a gross debt/EBITDA ratio of 2.03x. 

Source: Kenanga Research - 6 Oct 2015