We came away from AXIATA’s annual analyst & investor day last Friday feeling reassured of its AXIATA 5.0 aspiration to transform itself to a telco-tech company (from a telco company), although the timeline has been pushed back to 2027 (from 2024) (due to the disruption from the pandemic). Reflecting the deconsolidation of Celcom’s earnings following the completion of the Celcom-Digi merger, we cut our FY22-23F net profit forecasts by 3% and 16% respectively, but fine-tune up our TP by 1% to RM3.96 (from RM3.90). Maintain at OUTPERFORM.

We came away from AXIATA’s annual analyst & investor day last Friday feeling reassured of its prospects. The key takeaways are as follows:

1. CELCOM-DIGI legally came into being on 1 Dec 2022, AXIATA will consolidate only 11 months of CELCOM’s contribution for FY22. However, balance sheet deconsolidation will only be on 1 Jan 2023. The final cash and settlement amount received from the merger will be at RM5.2b (RM2.8b in cash-higher due to the strong performance of CELCOM). Meanwhile, with the successful conclusion of AXIATA mandatory tender offer in 4Q 2022, AXIATA’s stake in LinkNet now stands at 79.5%.

Recall, XL Axiata aspires to become the leading convergence operator in Indonesia, strengthening its synergy with LinkNet via cross selling to 800k home subscribers. With >3m home broadband customers in 27 cities. LinkNet expects a to double its market share in 3-5 years. At present, Internet service is stil under-penetrated in Indonesia with data being basic need in Indonesia currently hence XL is confident of a 5- Year CAGR data growth of 6% riding on Indonesia’s expected data growth of 17%.

2. EDOTCO, currently the 6th largest tower infra globally will capitalise on 5G deployment in Malaysia and at the same time accelerating its growth in both Indonesia and the Philipines which are categorised as growth markets. Together with Malaysia and Bangladesh (core markets) these markets will contribute 85% in revenue and 87% in EBITDA in the long term. 80% of towers owned by EDOTCO will be coming from both these markets. In reassuring sustainability, leasing contracts for its towers are on average 8 years.

3. The prevailing inflationary pressure are opportunities for AXIATA’s other telco companies to reset. Both Dialog (Sri Lanka) and Robi (Bangladesh) seeing growth with Robi seeing a 10-15% growth in both voice and data. Dialog are focusing on ARPU play – charging higher Price but with a larger data quota and will be focussing on network optimization and green energy in the immediate term. Robi is seeing its voice business stabilizing and will be focussing on this segment in the coming 5 years. NCell (Nepal) seeing its market shrinking will be focusing on cash preservation and not focussing on retaining customers but building high value customers in the immediate term.

4. Due to the disruption from the pandemic, the timeline for AXIATA 5.0 aspiration, an initiative to transform itself to a telco-tech company (from a telco company), has been pushed back to 2027 (from 2024). AXIATA sees earnings sustainability at its telco operators (CELCOMDIGI, XL AXIATA, ROBI, DIALOG, NCELL, SMART, and LINKNET). Its mobile operations are expected to generate positive free cash flow (with capex tapering) and self-sustaining in terms of funding. Its telco infrastructure company led by EDOTCO will tap into the capital market to fund its growth opportunities arising from the 4G/5G rollout in its operating markets. Its digital companies; ADA and BOOST, will tap into the private equity market to fund expansion driven by digitalisation of economies.

5. AXIATA is targeting a gross debt/EBITDA of 2.5x by 2025 and a DPS of 20 sen by 2027. In the immediate term, the company is committed to a DPS of 10 sen.

Forecast. We trim our FY22F earnings forecast by 3% to reflect AXIATA’s consolidation of only 11 months of Celcom’s earnings (vs. full-year previously). We also cut our FY23F earnings forecast by 16% largely to reflect the deconsolidation of Celcom’s earnings.

We continue to like AXIATA for: (i) its strong foothold in the growing telco markets in the region, (ii) its dominant position in the telco tower sector in the region via EDOTCO, and (iii) the strong execution of its M&A strategy, having concluded major acquisitions in Indonesia and the Philippines recently and iv) sustainable and diverse revenue stream coming mobile operations, telco infra and digital.

We raise our SoP-derived TP by 1% to RM3.96 (see below) on account of higher quantum cash received from the merger and a higher stake in LinkNet. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see page 3).

Source: Kenanga Research - 5 Dec 2022