We attended Axiata’s Analyst & Investor  Day 2013 yesterday and came away  cautiously  optimistic  on  the  group’s  future  growth  prospects. Data  remains  its  key  revenue  growth  driver,  but  challenges  remain  in increasing  its  profitability.  Nonetheless,  prospects  of  improving  ROIC and  rising  free  cash  flow  promise  more  dividends  going  forward. Maintain NEUTRAL.

-  Data takes centre stage. Management’s key focus was increasing data profitability,  which  we  think  remains  challenging.  Axiata’s  Malaysian operation  commands  the  highest  EBITDA  margin  on  data  among  the operating companies (opcos), but even Celcom’s  margin stands only at low-30%  in 2013, which  is  a small improvement from 30% in 2012. The industry’s struggle to price data correctly and disruptive pricing practices are key risks to achieving better returns from data.

- Emphasis on improving ROIC. Management did not dwell too much on future  revenue  growth  opportunities  and  expects  a  slower  revenue growth  pace  in  2013-14.  Instead,  it  emphasised  the  creation  of shareholders’ value through improving ROIC (return on invested capital), which  is  expected  to  surge  from  2015  as  capex  intensity  reduces substantially via collaboration and outsourcing efforts.

- EBITDA margin to remain flat.  Management downplayed expectations of  EBITDA  margins  improvement  despite  embarking  on  more  costsaving initiatives. This is unsurprising given the challenges  in increasing data  profitability  while  data  becomes  a  larger  contributor  to  overall revenue. The voice revenue decline has been mitigated in key markets, but SMS revenue is being squeezed by OTT (over the top) players.

- Investment case.  Maintain NEUTRAL,  with an unchanged sum-of-parts (SOP)  FV  of  MYR6.55.  While  Axiata’s  future  earnings  growth  remain challenging due to XL’s current underperformance and potential earnings dilution  to  XL  from  acquiring  Axis,  proper  execution  should  boost earnings in the longer term,  while capex savings could allow XL, and in turn Axiata,  to pay more dividends. Monetisation of its tower assets is a longer-term catalyst for Axiata.

Source: RHB