AXIATA hosted its annual Analyst & Investor Day virtually. We came out more optimistic on the longer-term prospects of the group as they laid out a new 5-year plan (up to 2024). By the end of it, the group aims to have drastically reduced the cost per GB and add more non-mobile revenue drivers, amongst others. High dividend payment capabilities are also aspired. While near-term challenges prevail, we upgrade it to OP with a higher SoP-driven TP of RM4.30 (from RM4.00) as we pencil in better longer-term assumptions.

The 5:10:20:20 equation. Management has drawn a 5-year plan (up to 2024) whereby they would strive to achieve: (i) less than USD 10 cents in cost/GB (from USD 60 cents in 2019); (ii) group EBIT margin of more than 20% (from 14.4% in 2019); and (iii) dividend payments per share of at least 20 sen (4 years averages at 8-10 sen).

Nailing down on expenses. To achieve a much leaner operating structure, the group targets to generate cost savings of RM3b-RM4b by 2024, thereby reducing its cost/GB. Progressively, this will be mainly driven by more efficient network management which includes better spectrum optimisation and transitioning to more efficient technologies to deliver voice and data services. The earmarked shutdown of our national 3G network should also reduce maintenance needs with the plan to fully mature VoLTE capabilities for most OpCos could ensure that the quality of voice services are not compromised. Enhancement to procurement processes would also be one of the pillars to optimising cost management.

Reducing reliance on mobile. Typical from the evolution of the mobile business, lower revenue/GB (albeit offset with higher traffic demand) is to be expected on more efficient infrastructure and with tight regulations and naturally competitive landscape, other avenues of growth have to be considered. Hence, the group looks to leverage on the potential of its other businesses. Edotco aims to diversify its revenue portfolio by entering new markets which are outside the existing OpCos’ footprint. Other opportunities also present themselves with staff re-skilling allowing the towerco to offer new services in line with developments in digitalisation, edge computing, 5G and fibre. On the digital front, the group opines that it could sustainably achieve net profitability before 2024 as greater consumer adoption could lead to better economies of scale with more structured business methods being pursued. Helping to achieve this is the segment’s insurtech partnerships and digital financing slowly taking off. Meanwhile, the group projects that it can meaningfully grow its enterprise clientele from partnerships with tech hyperscalers and offer value-add B2B solutions.

Overall, this should stretch the group’s EBIT margin potential and also pave the way to its 20 sen dividend target by 2024 onwards.

Post-update, we keep our FY20E earnings unchanged but raise our FY21E assumptions by 24% accounting for preliminary outcomes from the abovementioned initiatives.

Upgrade to OUTPERFORM with a higher SoP-driven TP of RM4.30 (from RM4.00). We append better longer-term assumptions into our SoP components, resulting in the higher TP. We believe sentiment for the stock should also improve with the direction provided by this 5-year plan. Further, possible industry consolidations could lean in favour of the group given its heavy exposure in both mobile and infrastructure (refer to the overleaf for a briefing commentary on industry consolidation). The group’s dividend aspirations could also attract the more idle investors. Assuming its 20 sen target were to be delivered today, this translates to a yield of 5.2%.

Consolidation is only a matter of time. Management agrees that one approach to optimise assets would involve industry consolidation. Currently, Malaysia and Indonesia both stand to be the most likely participants within the AXIATA group to be involved. Indonesia has itself been mulling over the matter with the newly imposed omnibus law seeking to drive industry efficiency gains by resource sharing, collaboration or via an effective merger. We feel the matter might be trickier in Malaysia with the existing Big-3 players each having cemented their own following and value proposition. Additionally, duplication of assets and infrastructure in Malaysia could be more prevalent with market leaders having already set their footprint particularly in highly populated areas. Valuations would pose as another hurdle to the materialisation of such plans. Recall that in 2019, the discussed merger between AXIATA and the Telenor Group fell apart after several months of negotiation and due diligence, which we suspect could be owing to incompatible synergies and under-pricing of certain aspects of the deal.

Risks to our call include: (i) weaker-than-expected service revenue, (ii) stronger -than-expected OPEX, (iii) stiffer competition, and (iv) regulatory pressures from regional operations.

Source: Kenanga Research - 4 Dec 2020