AXIATA reckoned that macro challenges are not significantly holding back the growth momentum in its frontier markets such as Bangladesh, Cambodia and Sri Lanka. It is also open to gearing up further on its balance sheet should growth opportunities knock on its door. We maintain our forecasts, TP of RM4.18 and OUTPERFORM  call.

We came away from AXIATA’s post-results briefing last Friday feeling reassured of its prospects. The key takeaways are as follows:

1. AXIATA reckoned that macro challenges are not significantly holding back the growth momentum in its frontier markets such as Bangladesh (Robi), Cambodia (Smart) and Sri Lanka (Dialog). Robi is seeing higher revenues driven by data and voice. Similarly, Dialog expects higher data revenues driven by centralized traffic, while the  Sri Lanka’s economy is gradually recovering with its inflation and  currency stabilising. Meanwhile, Smart’s topline will be driven by  prepaid, international business and inbound roaming demand.
    
2. The Indonesian market is still underpenetrated, offering exciting  long-term growth opportunities. However, over the immediate term, demand for telecommunications services seems to be easing from  the spike seen during the pandemic while the premium segment (where Axiata’s 79.5%-owned Link Net focuses on) is getting more  crowded with the entrance of new players.
    
3. It is making Link Net a wholesale provider, supplying to XL and other internet service providers. XL will be positioned as a converged mobile, fixed content service provider to capitalize on market opportunities with Link Net scaling up the deployment of fibre cables access to 8m (from >6m) homes in the next five years. Link Net is currently offering higher speeds and attractive packages to entice premium customers.
    
4. The high finance costs in 3QFY23 came mostly from XL (Indonesia),  Robi (Bangladesh) and EDOTCO. Gross debt/EBITDA ratio ballooned to 3.6x which Axiata expects will fall to 3.4x by 2QFY23  as the repayment of RM2.4b in Celcom’s shareholder loan will come in by then. 29% of the group’s borrowings will mature within two years, on track to achieve the targeted gross debt/EBITDA of 2.5x  by end- 2025. The RM540m finance cost seen in 1QFY23 is likely the run rate for the whole 2023, with a possibility of spilling into 2024.
    
5. Moody’s and S&P’s thresholds on AXIATA’s gross debt/EBITDA  threshold is 3x and 4x, respectively. The company’s focus is now to sort  out its debt at EDOTCO. Moving ahead, it is open to gearing up further on its balance sheet for growth opportunities. At this moment, it is open for a strategic investor in EDOTCO though there is currently no development. For Dialog, it sees opportunities for the proposed combined operations of both Dialog and Airtel. Given that AXIATA is still on the lookout for further investment opportunities, debt will remain elevated but will be maintained below the threshold.

Forecasts. Maintained.

Consequently, we keep our SoP-derived TP at RM4.18 based on SoP valuation (see next page). There is no adjustment to our TP based on ESG  given a 3-star rating as appraised by us (see page 4).

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. Maintain OUTPERFORM.

Risks to our call include: (i) adverse currency fluctuations in the frontier markets, and (ii) risks associated with overseas operations.

Source: Kenanga Research - 29 May 2023