We attended Axiata’s annual investor day, which included presentations on its near and medium term strategies. Having endured the perfect storm in 2016, 13 ‘needle moving’ initiatives have been highlighted, of which 9 are expected to be achieved in 2017. The turnaround at Celcom and XL will be central to its plans. Celcom will move back to the basics, as it seeks to regain its network leadership position. XL will need to refine its transformation efforts, which include incentivising its dealer network and creating a clear brand proposition for XL. A healthy revenue and EBITDA growth is expected in 2017. But, due to increased investments, competition and merger costs, revenue is expected to grow faster than EBITDA. No change to our estimates. Maintain BUY on Axiata with a TP of RM5.35/share.

Perfect Storm

Axiata endured a perfect storm in 2016. Share prices for Axiata, XL, Idea and M1 hit five year lows. Affected by both external and internal factors, Celcom and XL fell below expectations. Idea and M1 were affected by expectations of new competitors in India and Singapore.

Needle Moving Initiatives

Emerging from this, the group highlighted 13 key ‘needle moving’ initiatives, of which 9 are expected to be achieved by 2017. These are:

1. Opco performance especially Celcom & XL turnaround and transformation – no. 1 or strong no. 2 by 2017-2018.

2. Product leadership and innovation – centrally coordinated, segmentation of 1, loyalty, cross selling by 2018.

3. Network/IT/Technology superiority – out invest when no. 1, targeted when no. 2 by 2017-2018.

4. Digitisation – mind set, consumer facing, new business models by 2019.

5. Distinct competitive value proposition – product innovation, customer intimacy vs price leadership by 2017-2019.

6. Go to market modernisation – towards modern and digital channels by 2019.

7. New growth areas and modernisation – enterprise/IoT, convergence, digital, infra by 2018-2020.

8. New business models and disruptive technologies – solutions led to infra led, non-terrestrial NW by 2019-2020.

9. Industry restructuring and rationalisation – consolidation and NetCo by 2018-2019.

10. Cost optimisation for opex and capex – top down/centrally coordinated by 2018.

11. Balanced portfolio – long term vs short term ROIC, valuation, capital allocation, risk management by 2019-2020.

12. Organisational and cultural changes – refreshed management and boards, digital mind set, right touch model by 2017-2019.

13. Customer ownership – connecting the dots.

Celcom – Turnaround

Central to its plans and first on the list are turnarounds at Celcom and XL. As part of its organisational refresh, Michael Kuehner has taken the role of CEO at Celcom. Aiming to claw back market share, strategies are centred on creating a leaner corporate structure, providing an industry leading customer experience and deep digitilisation.

Primary attention will be placed on regaining lost ground from its previous network leadership position. Network quality is rated highly as part of a customer decision criteria. Increased investments will be placed on its network, with focus on network modernisation activities, upgrading existing LTE sites, expanding LTE coverage and fiberisation of sites. By 2017, it targets to achieve a LTE population coverage and site fiberisation of ca. 90% and 50% respectively. Aspiring to deliver the best video experience, objectives include: 1) 98% video play success rate; 2) <5 seconds video launch and 3) >99% no buffering.

Sharing internal timelines, Celcom is expected to stabilise by 4QFY16-1QFY17, grow faster than the industry within 2QFY17-4QFY17 and achieve sustainable growth from 2018-2019 onwards.

XL – Execution Refinement

For XL, efforts will be on improving communication for its XL brand proposition and revamping its traditional distribution channels.

Referencing its dual brand strategy, Axis has been performing well, with its appeal to cost conscious customers clearly defined. On the other hand, XL has been struggling. While targeted at the middle class heavy data smartphone users, its proposition is unclear and mixed. Its products are neither here nor there, appealing to all segments. To address this, increased communication and branding strategies will be enacted to clearly distinguish both brands. XL aims to differentiate itself by providing priority experience, status, excitement and appreciation to its target market of white collar wealthy individuals, blue collar and housewives.

Issues were also identified within its traditional distribution channels, which still forms 99% of its acquisition activities. This include less attractive trade incentives & programs, smaller reach in terms of outlets and weaker availability & visibility of products. Improving efforts, it will revamp its KPI and commission schemes. Also, steps will be taken in dominating retail outlets to improve its availability, visibility and advocacy.

Closing the network gap outside Java, it has started rolling out 3G services on its 900MHz spectrum – due to less legacy service traffic. Data customers now will have 6x better network coverage and 2x stronger in building signal.

The timeline for XL is to grow faster than the industry by 3QFY17.

edotco – The Next Step

Providing some updates on its towerco, the company has been performing well. Revealing pro forma numbers for the first time, YTD FY16 revenue and EBITDA increased 27% YoY and 44% YoY to RM1,104mn and RM514mn. The number of managed and operated sites rose 18% YoY and 3% YoY to 8,130 and 17,054 sites. It now manages ca. 25,200 towers across five markets, with a tenancy ratio of 1.52x. Showing customer trust in its independence, revenue share from non-Axiata tenants have increased 10pp to 33%. Some milestones achieved include reducing tower capex, site opex per tower and energy cost by 15-40%, 6% and 11%. No timelines were set, but its aspirations are to become one of the top 5 global towercos. To achieve this, another 15- 20k towers is required.

Axiata Digital Services – Enabling and Monetising Digital Applications

Key highlights were also provided for Axiata Digital Services. There are now 30 companies under its stable, of which 19 were internally incubated. It currently serves 21mn customers across its portfolio. Expecting to grow revenues by 2.6x in FY16, numbers are on track to meet its revenue target of US$1.0bn by 2020. Its EV is expected to reach US$2.0bn in 2020. Similar to the group’s objectives, targets are for its companies to be the no. 1 and no. 2 in their respective verticals.

Cost Optimisation

In view of the challenging environment, the group shared some of its short to medium term cost saving initiatives. Some of this include establishing netcos, increased collaborations, digitisation, reviewing dealer structure, removing physical bills and right sizing. If enacted successfully, these measures can potentially cut capex, network costs, sales & marketing and productivity & others by 55%, 24%, 16%, 3% and 2% by 2019.

Outlook

Management expects healthy revenue and EBITDA growth in FY17. However, revenue is expected to grow faster than EBITDA. This is due to increased investments, competition and costs from the merger between Robi & Airtel. There may be one-off impairments on Idea and Airtel. Regarding the divestment of stakes in its opcos, there are no plans for the moment. Not discounting the possibility, stakes can be pared down as part of its capital management initiatives, which may then be used to reinvest in the company or invest in other companies. Disposals may also be considered if it is unable to improve the performance of its opcos to meet its WACC requirements.

Valuation

We value the stock at an unchanged TP of RM5.35/share – based on a SOP valuation. While there are still challenges at the group, we believe risks have been priced in at existing levels. It is currently trading close to 1SD below its historical average EV/EBITDA at 6.7x. We also view the group as a net beneficiary of the weak ringgit, with ca. 70% of its revenues coming from outside Malaysia. Forward dividend yields are decent at 3.4-4.2%. BUY.

Source: TA Research - 9 Dec 2016