We turned more positive on Axiata Digital Services (ADS), with better-than-expected prospects ahead. We raised FY22E earnings and FY21E/FY22E DPS from 8.0/10.0 sen to 9.0/12.0 sen. BUY on SoP-TP of RM4.30 premised on share price weakness and higher valuation for ADS, which we think will increasingly drive investor interest. We believe there will be heightened excitement around ADS moving into FY22, partially driven by greater visibility on the business. We switch our ADS valuation from 3.5x EV/Sales to 30x EV/EBITDA, as we have greater visibility of its track to profitability. Note that there is room for upside in our SoP TP should we raise the Celcom Digi valuation on potential positive developments on the 5G rollout.

Tailwinds behind ADS may be stronger than expected, with its guided FY21 sales of RM1.1bn exceeding our RM700m projection. Strong sales and increasing scale will continue lifting ADS’ EBITDA growth and expediting Boost's path to profitability. ADS' e-commerce and digital marketing segments should continue to see strong growth for years to come. Continued e-wallet adoption and Boost's healthy loan growth should bring it to be EBITDA positive in FY22.

edotco continues to expand regionally (inorganically in new markets) to be the top 5 tower company globally, vs. its current rank of 7th place and 16th last year. No guidance on IPO timeline, but edotco continues to work on achieving scale to attract a higher valuation. Post-acquisition Debt/EBITDA of 2x provides edotco ample room to borrow for further acquisitions, with management eyeing 3.5x or higher to optimize its balance sheet.

Both Celcom and XL continue to drive growth via convergence propositions, with cost-savings initiatives. Axiata is set to meet its 5: 10: 20: 20 targets - in 5 years (by 2024), to achieve: (i) cost of 20% (~15% YTD), and (iii) DPS of 20 sen, with edotco as a key future contributor.

Source: Rakuten Research - 9 Dec 2021