We attended AXIATA’s 2019 Analyst and Investors Day, led by management from the group and key subsidiaries. We are assured by the group’s efforts to keep profit sustainable with an optimum customer experience. Its 5-year cost savings target of RM5b initiated in 2017 looks to be on track for 2021. Targeted capex decisions and maintenance of service quality are amongst the frontlines for achieving desired returns. Maintain OP and SoP-driven TP of RM4.80.

Optimisation in check. In the recent 9MFY19 results, the group recorded revenue of RM18.32b (+4% YoY) but achieved a pre-MFRS 16 EBITDA of RM6.94b (+10% YoY). Most OpCos (except Celcom and NCell) were boosted by larger subscribers and higher ARPUs, with sustainability held by: (i) better management of network cost across key regions, (ii) digitalising and automating support functions (i.e. sales, customer engagement), and (iii) strategizing capex rollouts and expansion, amongst others. Management guided that thanks to ongoing efforts, since 2017 the group has so far generated cost savings of RM3.6b, working towards the earmarked RM5.0b in 2021.

ROIC focused. Calculated and targeted investment decisions were a key highlight, with spending needed to be justified by reasonable cases and returns being churned. Data heavy demand has been propelled by more hours being spent for video streaming. This has led to targeted enhancements to network consistency, latency, upload and download speeds for optimised user experience at better managed capex spends at lower intensity. XL in Indonesia gathered that it could obtain ideal returns by focusing network investments to upgrade “Below Average” cities. We reckon this has to do with higher demand for connectivity there, being scarcely provided while crowded “Above Average” cities could experience fierce rival telco presence.

Dual brands, best of both worlds. So far, XL and Robi are operating with two brands under their portfolios, being XL with Axis and Robi with Airtel, respectively. This aims to cater to different demographics while also enabling the OpCos to offer tailored packages and pricing based on customer needs. We see that this could also be appealing to consumers, contributing to the success XL’s ex-Java expansion. Note that XL and Robi are positioned as the #2 and #1 telcos by revenue and subscribers in their respective countries.

M&As still a thing? Post-falling out of the mega merger with Telenor, management continues to be open to M&A opportunities. Recent news flow of local partnerships being inked for resource sharing and collaborations, especially with 5G ahead, seem to lead investors on that some sort of consolidation is imminent. The same is seen in Indonesia with operating efficiency and network coverage being much desired. On CK Hutchinson’s (which operates “3”) expression of interest to hold hands with XL, management did not provide any confirmation but indicated that local ministers appear supportive to the possibility.

Post-update, we leave our assumptions unchanged.

Maintain OUTPERFORM and SoP-driven TP of RM4.80. Our SoPdriven TP implies a 5.6x FY20E EV/Fwd EBITDA, which is -1.5SD below the stock’s 3-year average. While there may be many moving parts in the group, we believe that it is on track in building up its sustainability. Sentiment for the stock could have been bashed with the cancellation of the merger with Telenor. However, we believe that developments of other potential tie-ins could reinvigorate interest, presenting a decent risk-to-reward backed by a guarded earnings outlook

Source: Kenanga Research - 3 Dec 2019