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Company Update
Earnings & Valuation Summary
FYE 31 Dec 2018 2019 2020E 2021E 2022E Revenue (RMm) 23,885.8 24,583.3 23,967.3 24,239.7 24,698.5 EBITDA (RMm) 7,741.7 10,839.9 10,747.8 11,110.7 11,431.1 Pretax profit (RMm) -4,345.7 2,872.2 2,249.3 2,365.6 2,558.5 Net profit (RMm) -5,034.6 1,457.6 863.8 996.2 1,104.3 EPS (sen) -55.5 15.9 9.4 10.9 12.1 PER (x) -6.9 24.1 40.7 35.3 31.9 Core net profit (RMm) -1,102.4 959.7 788.9 996.2 1,104.3 Core EPS (sen) -12.2 10.5 8.6 10.9 12.1 Core EPS growth (%) -246.8 -186.2 -17.8 26.3 10.9 Core PER (x) -31.6 36.7 44.6 35.3 31.9 Net DPS (sen) 9.5 9.5 8.0 9.2 10.2 Dividend Yield (%) 2.5 2.5 2.1 2.4 2.7 EV/EBITDA 6.3 5.9 5.9 5.8 5.6 Chg in EPS (%) - - - Affin/Consensus (x) 1.0 1.0 0.9 Source: Company, Affin Hwang estimates
RM3.84 @ 3 December 2020
Share price performance
1M 3M 12M Absolute (%) 31.1 27.2 -8.0 Rel KLCI (%) 17.6 18.3 -11.7
BUY HOLD SELL
Consensus 11 14 1 Source: Bloomberg
Stock Data
Sector Telecom
Issued shares (m) 9,169.5
Mkt cap (RMm)/(US$m) 35,211/8,647
Avg daily vol - 6mth (m) 4.4
52-wk range (RM) 2.66-4.75
Est free float 23.8%
Stock Beta 0.99
Net cash/(debt) (RMm) (19,873)
ROE (CY21E) 6.1%
Derivatives Nil
Shariah Compliant Yes
Key Shareholders
Khazanah 36.8%
EPF 17.6%
PNB 14.7% Source: Affin Hwang, Bloomberg
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Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20
(RM)
Isaac Chow
T (603) 2146 7536
Axiata Group Berhad (AXIATA MK)
HOLD (maintain) Price Target: RM3.95 Up/Downside: +2.9% Previous Target (Rating): RM3.95 (HOLD)
We like the plan but targets look ambitious
Management presented Axiata’s Vision 2024 where the group aspires to
deliver 4 targets for its shareholders – including lower costs, higher EBIT
margins, higher dividends (> 20 sen) and to achieve ROIC > WACC.
Management’s strategy to increase dividend is 4-pronged including: (i)
growing its revenue; (ii) lowering opex and finance costs; (iii) trimming the
capex, and (iv) increasing the payout ratio of its operating companies.
Maintain HOLD. While we like Axiata’s focus on improving profit margins
and free cash flow, its 2024 aspirations (profit margin, dividend) look
ambitious to us, considering the stiff competition, high regulatory risks and
high capex requirement to maintain / upgrade the telco network.
Axiata’s vision by 2024 – Next Generation Digital Champion
Axiata hosted its annual analyst & investor day yesterday. Deputy Group CEO Dato’
Izzaddin Idris presented Axiata 5.0 – the group’s aspiration to be the “Next
Generation Digital Champion” by 2024 and to deliver 4 targets for its shareholders /
investors within 5 years (Fig 1). These include: (i) to lower the unit production cost;
(ii) to achieve EBIT margin of >20% (from 14.4% in 2019); (iii) to deliver dividend of
over RM0.20 / share (from 8 -10 sen over the last 4 years); and (iv) to achieve ROIC
> WACC.
Repositioning to be a high dividend company
Axiata’s Group CFO Vivek Sood detailed the strategy to increase dividend to over 20
sen / share by 2024. Firstly, Axiata targets to increase its net profit to over RM1.8bn
by growing its revenue (+RM6bn), reducing opex and depreciation / amortisation (by
optimising capex) and reducing its finance costs by over RM100m (tapping into
cheaper funding). Secondly, Axiata plans to keep its mobile capex at <RM5.5bn via
stringent budget allocation and savings in network / IT / procurement costs by better
planning of network architecture / technology. Lastly, Axiata has revised the dividend
policy for its OpCos to a minimum payout of 50% to stream up cash.
Aiming to grow Celcom’s EBIT to RM1.6-1.8bn by 2022
Celcom Axiata’s CFO Jennifer Wong shared the group’s plan to increase Celcom’s
EBIT to RM1.6-1.8bn by 2022 (from RM1.3bn in 2019). Some of the initiatives include
faster time to market, empowering the regional office, IT in-sourcing (reduce vendor
dependency) and revamp its retail operations. Celcom is targeting RM250-270m cost
savings by 2022, with 80% of the target value initiatives have been identified.
4 December 2020
“While we like Axiata’s plan to improve profitability / cash flow,
the targets look ambitious, considering the tough market”
2
The non-mobile businesses: plans and growth opportunities
- Axiata Digital Services (ADS): Management shared that ADS in on track to
achieve profitability by 2022. The digital business is now in its Phase 3 (Value
Capture), where Axiata will focus on creating more value, attracting new
strategic / financial investors and exploring monetisation opportunities. In
Malaysia, the Boost e-wallet has 8.8m users as at end-September 2020 and
217k merchant points. The active users transact an average RM330+ per week;
Boost achieved a one-month profit in August 2020 before reverting to losses and
management is confident that Boost is on track to profitability by 2022.
- edotco: Axiata’s tower business, edotco, has operations in 6 countries currently
and is expanding into Laos and the Philippines. The group has 22k towers
currently and plans to organically grow the portfolio to 30-35k by 2024. In
addition to the organic growth, edotco aspires to undertake M&A to double its
portfolio to 70k towers by 2024. edotco is exploring opportunities in Vietnam,
Thailand and Indonesia. Management has no plans to list edotco in the near
future – citing a strong balance sheet where edotco can still self-fund the M&As.
- Enterprise business: Axiata has also identified the Enterprise segment as a
new growth area. Axiata is committed to grow the Enterprise revenue from
RM1.6-1.7bn in 2018/19A to over RM5bn in 2024. Axiata will offer the services
to the full spectrum of clienteles, ranging from micro businesses (offering basic
connectivity), medium to small enterprises (applications, standardized services)
and the large enterprise / government sector where Axiata will work with its
partners (ie, Google Cloud and Microsoft) to offer complex solutions.
Key challenges and opportunities
Axiata’s outgoing President and Group CEO Tan Sri Jamaludin Ibrahim identified
several challenges including operational disruptions and possible economic
weakness brought forth by the Covid-19 pandemic, the increased competition in
several markets (ie, Indonesia, Malaysia), the regulatory challenges in several
countries (risk of higher taxation, spectrum) and the lack of a credible business case
for 5G deployment. On the other hand, Jamaludin saw good opportunities in the post-
pandemic new normal where demand for telco is expected to strengthen, possible
consolidation in Malaysia / Indonesia, monetisation / value illumination opportunities
for edotco and ADS, new growth area in the Enterprise segment, and cost
optimisation opportunities via its “Collective Brain” initiative.
We like the plan but the targets look ambitious. Also, the prevailing challenges
(competition, regulatory risks) may cap profit growth. Maintain HOLD
In general, we like Axiata’s increasing focus on profitability (ie, growing EBIT margin
to over 20%) and cash flow management (including more measured, results-driven
capex spending). However, the group’s 2024 aspirations look ambitious to us,
considering the competitive market conditions and high capex requirements to
maintain the integrity of the telco network during a time when data consumption is
surging. Also, we are not as bullish on the Enterprise segment. Taking into
consideration the prevailing economic conditions and the competition, the group’s
target to grow its enterprise revenue by 300% within 2024 looks like a tall order.
All in, we maintain our earnings forecasts, HOLD rating and SOTP-derived price
target of RM3.95. The business conditions in several markets remain highly
competitive (ie, Indonesia and Malaysia) while the weakened domestic economy due
to the Covid-19 pandemic has heightened the country risk in Sri Lanka and
Bangladesh. At 35x 2021E PER, the risk-reward proposition looks balanced. Upside
risks: stronger-than-expected quarterly earnings and value accretive M&As.
Downside risks include major earnings disappointments, unfavourable government
policy / tax changes and higher competition in key markets.
3
Focus charts
Fig 1: Axiata’s Vision by 2024 Fig 2: Axiata to re-position to be a ‘High Dividend Company’
Source: Company, Affin Hwang Source: Company, Affin Hwang
Fig 3: Revenue growth Fig 4: Lower mobile capex intensity to <20%
Source: Company, Affin Hwang Source: Company, Affin Hwang
Fig 5: Refine financial strategy Fig 6: Key challenges and opportunities
Source: Company, Affin Hwang Source: Bloomberg, Affin Hwang estimates
4
Fig 7: Axiata’s SOTP valuation
Source: Affin Hwang estimates
Operating
companies
Stake Value
(RMm)
Valuation basis
Celcom 100.0% 16.0 9x CY21E EV / EBITDA
XL 66.3% 10.3 6.5x CY21E EV / EBITDA
Robi 68.7% 4.1 4x CY21E EV / EBITDA
Dialog 83.3% 3.9 5x CY21E EV / EBITDA
Ncell 80.0% 2.8 4x CY21E EV / EBITDA
Smart 72.5% 2.7 4x CY21E EV / EBITDA
Edotco 63.0% 6.6 9x CY21E EV / EBITDA
Digital bussiness Varies 1.7 Based on implied valuations
Net Cash/ (debt) -5.6 Holding company level net cash/ (debt)
Total 42.7
Value/share 4.66
12-month target price 3.95 Based on 15% discount to SOP value
5
Financial Summary – Axiata Group Berhad
Source: Company, Affin Hwang estimates
Profit & Loss Statement Key Financial Ratios and Margins
FYE Dec (RMm) 2018 2019 2020E 2021E 2022E FYE Dec (RMm) 2018 2019 2020E 2021E 2022E
Revenue 23,886 24,583 23,967 24,240 24,698 Growth
Operating expenses (16,144) (13,743) (13,219) (13,129) (13,267) Revenue (%) (2.1) 2.9 (2.5) 1.1 1.9
EBITDA 7,742 10,840 10,748 11,111 11,431 EBITDA (%) (15.7) 40.0 (0.8) 3.4 2.9
Depreciation (7,080) (6,954) (7,161) (7,232) (7,352) Core net profit (%) (247.2) (187.1) (17.8) 26.3 10.9
EBIT 662 3,886 3,587 3,878 4,079
Net interest income/(expense) (1,051) (1,508) (1,432) (1,533) (1,541) Profitability
Associates' contribution (25) (3) 20 20 20 EBITDA margin (%) 32.4 44.1 44.8 45.8 46.3
Exceptional Items (3,932) 498 75 - - PBT margin (%) (18.2) 11.7 9.4 9.8 10.4
Pretax profit (4,346) 2,872 2,249 2,366 2,559 Net profit margin (%) (21.1) 5.9 3.6 4.1 4.5
Tax (902) (1,057) (877) (899) (972) Effective tax rate (%) 20.7 (36.8) (39.0) (38.0) (38.0)
Minority interest 213 (358) (508) (470) (482) ROA (%) (2.6) 2.1 1.7 2.2 2.3
Net profit (5,035) 1,458 864 996 1,104 Core ROE (%) (5.2) 5.7 4.9 6.1 6.7
ROCE (%) 1.6 9.9 8.5 9.2 9.6
Balance Sheet Statement Dividend payout ratio (%) (17.1) 59.7 85.0 85.0 85.0
FYE Dec (RMm) 2018 2019 2020E 2021E 2022E
Fixed assets 27,290 25,642 24,981 25,848 26,597 Liquidity
Other long term assets 24,364 31,375 31,395 31,415 31,435 Current ratio (x) 0.7 0.4 0.4 0.4 0.4
Total non-current assets 51,655 57,017 56,376 57,264 58,032 Op. cash f low (RMm) 6,104 9,890 8,978 10,283 10,579
Cash and equivalents 5,060 4,224 4,635 4,540 4,639 Free cashflow (RMm) (590) 3,159 3,978 3,683 3,979
Stocks 219 154 263 266 271 FCF/share (sen) (6.5) 34.5 43.4 40.2 43.4
Debtors 4,693 4,866 4,334 4,383 4,466
Other current assets 2,272 373 373 373 373 Asset management
Total current assets 12,244 9,618 9,605 9,562 9,749 Debtors turnover (days) 72 72 66 66 66
Creditors 11,177 12,291 10,900 11,024 11,233 Stock turnover (days) 3 2 4 4 4
Short term borrow ings 4,474 9,074 9,074 9,074 9,074 Creditors turnover (days) 171 182 166 166 166
Other current liabilities 2,730 3,088 3,088 3,088 3,088
Total current liabilities 18,381 24,454 23,062 23,186 23,395 Capital structure
Long term borrow ings 14,647 16,592 16,692 16,792 16,892 Net gearing (%) 80.5 132.5 129.6 129.6 128.3
Other long term liabilities 13,393 9,408 9,916 10,387 10,869 Interest cover (x) (6.1) (6.2) (6.5) (6.7) (6.8)
Total long term liabilities 28,040 26,000 26,609 27,179 27,761
Shareholders' Funds 17,477 16,181 16,310 16,460 16,625 Quarterly Profit & Loss
FYE 31 Dec (RMm) 3Q19 4Q19 1Q20 2Q20 3Q20
Cash Flow Statement Revenue 6,213 6,267 6,037 5,792 6,112
FYE Dec (RMm) 2018 2019 2020E 2021E 2022E Operating expenses (3,412) (3,542) (3,533) (3,209) (3,278)
EBIT 662 3,886 3,587 3,878 4,079 EBITDA 2,802 2,725 2,504 2,584 2,834
Depreciation & amortisation 7,080 6,954 7,161 7,232 7,352 Depreciation (1,846) (1,888) (1,848) (1,842) (1,762)
Working capital changes (1,681) 1,006 (967) 72 121 EBIT 956 837 655 742 1,071
Cash tax paid (902) (1,057) (877) (899) (972) Net int income/(expense) (369) (376) (384) (379) (383)
Others 945 (898) 75 - - Associates' contribution 1 0 6 3 7
Cashflow from operations 6,104 9,890 8,978 10,283 10,579 Exceptional Items (76) 66 63 33 (21)
Capex (6,695) (6,731) (5,000) (6,600) (6,600) Pretax profit 574 614 593 388 724
Disposal/(purchases) - 1,649 - - - Tax (267) (210) (194) (231) (257)
Others (329) 223 - - - Minority interest (128) (72) (210) (76) (115)
Cash flow from investing (7,023) (4,859) (5,000) (6,600) (6,600) Net profit 179 333 188 80 353
Debt raised/(repaid) (262) (575) 100 100 100 Core net profit 255 267 125 47 374
Equity raised/(repaid) 95 16 - - -
Net int inc/(expense) (1,051) (1,176) (1,432) (1,533) (1,541) Margins (%)
Dividends paid (691) (538) (734) (847) (939) EBITDA 45.1 43.5 41.5 44.6 46.4
Others 1,230 (3,441) (1,500) (1,500) (1,500) PBT 9.2 9.8 9.8 6.7 11.9
Cash flow from financing (678) (5,713) (3,567) (3,779) (3,880) Net profit 2.9 5.3 3.1 1.4 5.8
Free Cash Flow (590) 3,159 3,978 3,683 3,979
6
Important Disclosures and Disclaimer
Equity Rating Structure and Definitions
BUY Total return is expected to exceed +10% over a 12-month period
HOLD Total return is expected to be between -5% and +10% over a 12-month period
SELL Total return is expected to be below -5% over a 12-month period
NOT RATED Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a recommendation
The total expected return is defined as the percentage upside/downside to our target price plus the net dividend yield over the next 12 months.
OVERWEIGHT Industry, as defined by the analyst’s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months
NEUTRAL Industry, as defined by the analyst’s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months
UNDERWEIGHT Industry, as defined by the analyst’s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months
This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (14389-U) (“the Company”) based on sources believed to be reliable and is not to be taken in substitution for the exercise of your judgment. You should obtain independent financial, legal, tax or such other professional advice, when making your independent appraisal, assessment, review and evaluation of the company/entity covered in this report, and the extent of the risk involved in doing so, before investing or participating in any of the securities or investment strategies or transactions discussed in this report. However, such sources have not been independently verified by the Company, and as such the Company does not give any guarantee, representation or warranty (expressed or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or rendered in this report. Facts, information, estimates, views and/or opinion presented in this report have not been reviewed by, may not reflect information known to, and may present a differing view expressed by other business units within the Company, including investment banking personnel and the same are subject to change without notice. Reports issued by the Company, are prepared in accordance with the Company’s policies for managing conflicts of interest. Under no circumstances shall the Company, be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any securities. The Company its directors, its employees and their respective associates may have positions or financial interest in the securities mentioned therein. The Company, its directors, its employees and their respective associates may further act as market maker, may have assumed an underwriting commitment, deal with such securities, may also perform or seek to perform investment banking services, advisory and other services relating to the subject company/entity, and may also make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. The Company, its directors, its employees and their respective associates, may provide, or have provided in the past 12 months investment banking, corporate finance or other services and may receive, or may have received compensation for the services provided from the subject company/entity covered in this report. No part of the research analyst’s compensation or benefit was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Employees of the Company may serve as a board member of the subject company/entity covered in this report. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. This report, or any portion thereof may not be reprinted, sold or redistributed without the written consent of the Company. This report is printed and published by: Affin Hwang Investment Bank Berhad (14389-U) A Participating Organisation of Bursa Malaysia Securities Berhad 22nd Floor, Menara Boustead, 69, Jalan Raja Chulan, 50200 Kuala Lumpur, Malaysia. T : + 603 2142 3700 F : + 603 2146 7630 [email protected] www.affinhwang.com
