Axiata and RHB have announced a joint bid for a digital banking license from Bank Negara Malaysia. The current plan is for Axiata’s Boost to own 60% and RHB 40% in the digital bank JV, with the minimum RM100m share capital required for the foundational phase (3 to 5 years). No surprises here, as Axiata has long targeted such a license and been searching for a financial institution partner since 2020. The duo have a good chance of securing the license as: (i) Celcom is already serving the under-banked, (ii) RHB provides assurance of the digital bank’s ability to operate, and (iii) Axiata already has the framework to provide financial services. We foresee Axiata cross-selling its telco and banking products to boost customer acquisition and retention. Maintain OP with SoP-TP of RM4.20.

Profit contribution earliest in FY23. With BNM handing out licenses in 2022, we think the digital bank will begin operations in 2HFY22. In the initial years, we see the Group focusing on user and revenue growth. Therefore, any profit contribution would start earliest in FY23. We gathered that Boost has 9m active users as of today. Assuming micro-loans of RM1,000 and disbursed on average to a third of active users, it would achieve a maximum permissible total asset size of about RM3b during the foundational phase (minimum 3 years, max 5 years). Based on a hypothetical effective annual interest of 3%, this will yield Boost interest income of RM90m, as compared to FY21E revenue of RM25b.

Good chance of securing a license. We see three reasons why the duo can likely secure a license. One, Celcom already serves the under banked, namely among the B40 and rural populations with limited access to financial facilities. Two, with RHB onboard, this will likely benefit the consortium from the incumbent’s expertise and guidance, assuring BNM that they can operate with the necessary resources. Three, Axiata already has the framework to operate a digital bank. (refer overleaf for more)

Complementary services. We foresee that Boost will provide complementary financing facilities alongside its e-wallet services. As an e-wallet, Boost has valuable information on customers’ and merchants’ cash flows and behavior, allowing them to provide risk based pricing and product personalization. (refer overleaf for more)

Boosting convergence and customer stickiness. With a myriad of services (mobile, fibre, e-wallet, deposit, loans) under the Axiata organization, it will likely cross-sell its products and provide incentives to boost customer acquisition and retention. (refer overleaf for more)

Maintain OUTPERFORM and SoP-driven TP of RM4.20. At the moment, we have yet to impute Axiata Digital (comprising Boost and Aspirasi) into our valuation, but have included a RM1.1b valuation for ADA, which is 63.47% owned by Axiata Digital. In the near term, we believe the stock could react positively to further consolidation news in Malaysia and Indonesia.

Good chance of securing a license. We see three reasons why the duo can likely secure a license. One, Celcom already serves the underbanked, namely among the B40 and rural populations with limited access to financial facilities. This would allow the digital bank to easily reach and market to the target audience. Intending to reach the under-banked, BNM could favorably view Axiata's ability to reach segments under-served or overlooked by traditional banks. Two, with RHB onboard, this will likely benefit the consortium from the incumbent’s expertise and guidance, assuring BNM that they can operate with the necessary resources, possibly translating to fewer additional infrastructure investments by Boost. Moreover, this should help earn consumers’ trust in the new entity. Three, Axiata already has the framework to operate a digital bank. Through Boost, Axiata already has the customer relationships and KYC data to provide financial services. Moreover, Axiata is also experienced in making loans, namely in micro-financing solutions via its Aspirasi brand.

Complementary services. Without the banking license, Boost, an e-wallet platform, is not allowed to lend to customers. With the license, while Boost will likely generate a return on its customers’ idle funds, we suspect that the digital bank will likely provide a dedicated depository facility to collect funds. We foresee that Boost will also provide complementary financing facilities alongside its e-wallet services. As an e-wallet, Boost has valuable information on customers’ and merchants’ cash flows and behavior, allowing them to provide risk-based pricing and product personalization. RHB will likely reap similar benefits.

Boosting convergence and customer stickiness. With a myriad of services (mobile, fibre, e-wallet, deposit, loans) under the Axiata organization, it will likely cross-sell its products and provide incentives to boost customer acquisition and retention. Celcom has already partnered with Boost in Go-To-Market activities, and anyone claiming eBelia's RM150 incentive through Boost is currently entitled to additional Celcom phone rebate of up to RM100. Furthermore, with Celcom's launch of its first convergence plan (Celcom MAX), we would not be surprised if Axiata offers MAX subscribers a financing facility. Such incentives and benefits should boost the Group's customer acquisition and improve its customer stickiness.

Risks to our call include: (i) weaker-than-expected performance at Celcom and regional OpCos, (ii) poorer-than-expected costs management, and (iii) Celcom and Digi merger discussions fall through.

Source: Kenanga Research - 3 Jun 2021