Yesterday, we hosted ADA and Boost (together, making up Axiata Digital Services – ADS) virtually which left us feeling confident about both digital businesses’ prospects. ADA is poised to grow from continued growth in demand for data analytics and e-commerce services, with scalable profitability. Boost looks to leverage on its various segments and a potential digital banking license to fuel growth. Post con-call, while we tweaked our ADS estimates and valuation, we maintain our TP of RM4.30 and OUTPERFORM call.

ADA to ride on digitalization and e-commerce growth. Looking ahead, ADA looks to grab a larger share of firms' spending on digitalization, both in digital marketing and e-commerce. While ADA will continue increasing its reach of firms in finance, telecoms and FMCG, it is increasingly expanding into retail, automotive and other sectors as the digitalization trend gains steam. As ADA is the only firm in the region with such capabilities, it will continue to sell its integrated set of capabilities (i.e. all-in-one service) for its clients to quickly see revenue growth via data analytics and e-commerce. In addition to organic growth, ADA will likely conduct a series of small M&As to expand geographically and to expand its capabilities.

ADA's operating leverage to drive profitability. Having a large fixed cost base (staff @~70% of OPEX), and minimal variable costs, ADA's profitability will improve as it scales on better economies of scale. Over the next 3~5 years, we expect its EBITDA margins to expand from the current 10% to mid-teens percentage. While ADA’s PAT is currently not separately disclosed, we estimate that c.70% of its EBITDA flows down to PAT, as it has low D&A and interest expenses.

Boost: Digital Banking aspirations. While Boost Credit already makes loans to SMEs, its loans are currently equity funded by Axiata and Boost's investors (including Great Eastern). With a high cost of funds (low teens percentage), we estimate its NIM to be in the low single-digit percentage. Furthermore, the excessive pricing may lower consumer acceptance and affordability of its products. The potential award of the digital banking license would provide it access to deposits as a cheaper source of funds and lift NIM up to low double- digit. Boost's CEO has reiterated that should they win a digital banking license, Boost will mainly focus on making productive loans to SMEs.

Boost 2.0: The whole is greater than sum of parts. Boost is focused on growing its services ecosystem, such as leveraging its unprofitable payments business to acquire customers and alternative data to drive more profitable growth in its other segments, namely lending. While we estimate that Boost is currently loss-making at the EBITDA level, we estimate that it will be EBITDA positive in FY22 mainly through greater scale, as Boost Credit and Indonesia operations continue to grow from the SMEs’ gradual recovery and thus, loans growth.

(refer to the overleaf for our valuation methodology of ADS)

Maintain OP with TP of RM4.30. We continue to favor Axiata as our sector top pick for its regional exposure, as investors may shun domestic-only telcos amid the continued uncertainty regarding the single wholesale network. Moreover, we believe Axiata also provides exposure to two unique and promising digital businesses that have the potential to scale regionally and compete globally.

Source: Kenanga Research - 28 Jan 2022