With the completion of the merger with Digi.Com, Axiata Group (Axiata) is expected to recognise Celcom-Digi as an associated company with a 33.1% stake from this month onwards. During its Analyst and Investor Day 2022, management reinforced its immediate priority in strengthening the foundation of the group following several major acquisitions made in this year. Its key focus will be the frontier markets and unlocking future value with the aspiration to transform into a digital service provider in the long run. Based on our estimates, Link Net and the tower acquisition are not expected to provide significant earnings uplift in the near term, mainly due to high funding cost. Meanwhile, the rollout of 5G services would entail the payment of wholesale fees without any meaningful earnings contribution as we are not expecting take-up rate to be strong in the next 1-2 years. All in, we estimate that Axiata’s net profit could deteriorate by about 20-25% in FY23F. For now, we retain our Neutral call on Axiata.

• Strengthening the foundation. 2022 was a busy year for Axiata, making several major acquisitions to venture into the Indonesian fibre business as well as to expand its tower footprint. In September, the group completed its acquisition of Link Net, a fixed broadband player in Indonesia while in October it was the tower acquisition in the Philippines. It also secured digital banking licence in Malaysia. Lastly, 2022 also saw the completion of merger between Celcom and Digi. Going forward, Axiata will be focusing on strengthening its foundation to deliver organic growth and integrate new businesses. However, we are mindful of the risk of integration cost that could potentially be a drag to bottomline in the near-term. Also, balance sheet de-leveraging is crucial given that interest rates are likely to rise further and USD to remain strong. Currently, 32% of the group’s borrowings remain unhedged, with 28% maturing in 1-2 years (30% in 3-5 years).

• Transformation. In the longer run, Axiata aspires to transform from a communication service provider, which is essentially a telco, into a digital service provider to become more technology-focused. Hence, we believe Axiata Digital and the enterprise business would play a more active role in the future. This would enable the group to extract value and enhance shareholders’ return. For instance, a traditional telco player could probably fetch 6-7x EV/EBITDA but a digital solution provider may be valued at least mid-teens EV/EBITDA. Having said that, we believe competition is tough in this space and therefore, execution risk may be high.

• Near-term earnings risk. Despite its acquisitions and expansion in the emerging markets, near-term earnings outlook is not promising as we expect a downside risk of about 20-25% due to high funding cost, capital commitment on 5G as well as deconsolidation of Celcom. Although share price has fallen by about 20% since early this year, we feel valuation remains unattractive. We maintain our Neutral rating on the stock.

Source: PublicInvest Research - 5 Dec 2022