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Axiata Group Berhad Harsh Agarwal, CFA

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Axiata Group Berhad Harsh Agarwal, CFA Deutsche Bank Markets Research Asia Company Date 13 January 2016 Axiata Group Berhad Harsh Agarwal, CFA IG Corporate Credit Research Analyst Telecommunications (+65) 6423 6967 [email protected] Kalvin Fernandes Initiating with Hold Research Associate [email protected] Relative value Regional telcos: Compared to similar rated regional telcos in Asia, i.e. Bharti Airtel (BBB-/Baa3/BBB-) and PCCW-HKT (BBB/Baa2/NR), we think Axiata (BBB/Baa2) looks slightly cheap. Bharti is larger than the other two, but earns majority of its revenue and EBITDA from a single location - India, has high capex plans, higher leverage, and is rated one notch lower. PCCW-HKT too only operates in Hong Kong and has a relatively high leverage, however Hong Kong is a mature market and PCCW-HKT’s business is very stable. Axiata is similar in size to PCCW, and although it has a holdco structure, it also has a slightly lower leverage, operations are more geographically diversified, and benefits from government ownership. We believe Axiata should trade 20-25bps tighter than Bharti and flattish to PCCW-HKT. Considering the Bharti 2025s trading around G+245bp and typical 5-10 spread curve of 50-60bps in Asia IG, theoretical Bharti 2020s should trade at G+185-190bps, taking our fair value for Axiata 2020s to G+160-165bp. Even PCCW-HKT 2023s are at G+165bps, and hence, the current level of G+170bps for Axiata 2020s looks slightly cheap to us. Figure 1: Middle East Comps G spread 250 Sukuks from Middle East: Middle East investors took up ~20% of the Axiata JAFZSK 19 issue, hence we also compare them to Middle East corporate sukuks with 200 (NR/Baa3/BBB-) similar ratings. We see these comparable sukuks trading in a wide range of AXIATA 20 150 DEWAAE 18 (BBB/Baa2/NR) G+125bp to 200bp. Axiata 2020s fall somewhere in between and broadly look (BBB/NR/NR) MAFUAE 17 fairly valued (Figure 1). 100 (BBB/NR/BBB) 50 Petronas sukuks: With LTM (June-15) revenues of ~USD70 billion and EBITDA - of ~USD20 billion, Petronas is one of the largest oil & gas credits in Asia and is - 1.0 2.0 3.0 4.0 5.0 6.0 Years to Maturity significantly larger than Axiata. Considering this and the fact that it is almost wholly owned by the Malaysian government, we think Petronas is of relatively Source: Bloomberg Finance LP higher strategic importance. Petronas has adequate buffer from its strong balance sheet with a net cash position, even in the current low oil price environment to sustain its capex and dividend plans. It is also higher rated at A-/A1 by S&P/Moody’s. Given all these considerations, we think the Axiata 20s (sukuk) should trade around 20-25bps wider than Petronas 20s (G+145). Existing bonds: We note that the Axiata sukuks do look cheap vs. Axiata’s previously issued 2020 bonds which are trading at G+140-145bps., although the old bonds are illiquid and have a high dollar price. Conclusion: From the discussions above, we believe Axiata’s 2020 sukuks are broadly trading at fair value to slightly cheap and initiate with a Hold recommendation, especially given our negative view on markets in general. Key upside risks include debt reduction through tower sales in Indonesia or an IPO of edotco, their tower infrastructure unit. Key downside risks include further supply from Axiata, high capex at its subsidiaries and aggressive expansion plans. ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. 13 January 2016 IG Corporate Credit,Telecommunications Axiata Group Berhad Company Overview Background Axiata runs its business through operating subsidiaries in various countries. A table showing its stakes in the entities and their market values (if applicable) are shown below. We also give some operational and financial data of its key subsidiaries. Its largest shareholder with a 38.6% stake is Khazanah, a sovereign fund of Malaysia. Further, another 13.6% is held by Malaysia’s Employees Provident Fund and 10.2% by Permodalan Nasional Berhad (PNB), the Malaysian state fund management company. Moody’s has even given Axiata one notch uplift to their rating in view of this implied government support. One point to note though is that the new sukuks do not have a change of control provision. Figure 2: Stakes in operating entities Market Value Subsidiary/Associate Stake (MYR millions) Malaysia - Celcom Axiata 100.0% NA Indonesia - XL Axiata 66.4% 6,865 Sri Lanka - Dialog Axiata 83.3% 2,113 Bangladesh - Robi Axiata 91.6% NA Nepal - Ncell* 80.0% NA Cambodia - Smart Axiata 85.0% NA Pakistan - Multinet 89.0% NA Singapore - M1 Ltd 28.3% 2,148 India - Idea 19.8% 5,932 Total 17,058 *Proforma for acquisition. Source: Company data, Bloomberg Finance LP Figure 3: Key subsidiaries Particulars Celcom XL Axiata Dialog Robi Revenue 7,479 6,875 2,212 2,928 EBITDA 2,818 2,511 737 1,053 PATAMI 1,436 (142) 188 221 Capex (899) (1,716) (475) (1,377) FCF* 1,919 796 262 (323) Cash 1,312 1,093 255 147 Total Debt 4,482 8,113 814 742 EBITDA margins 37.7% 36.5% 33.3% 36.0% Net debt / EBITDA 1.1x 2.8x 0.8x 0.6x Subscribers ('000) 12,509 41,469 10,312 28,373 ARPU (MYR) 45 11 12 8 MOU/sub (min) 189 108 148 132 All figures are for LTM Sept-15 and are in MYR millions unless otherwise specified *FCF is calculated as EBITDA - Capex Source: Company data Expansion into Nepal - Acquisition of Ncell Axiata Group recently announced the acquisition of Ncell, the largest Telco in Nepal for ~USD1.4 billion. Ncell has a 57.5% revenue market share and a 49% subscriber share in Nepal with a subscriber base of 13 million. For FY15 (July end), it earned revenues of USD557 million, EBITDA of USD347 million at a Page 2 Deutsche Bank AG/Hong Kong 13 January 2016 IG Corporate Credit,Telecommunications Axiata Group Berhad margin of 62% and PAT of USD183 million and is expected to contribute ~9% and ~13% to Axiata’s revenue and EBITDA respectively. However, a point to be noted is that it receives ~35-40% of its revenues from international calls which are expected to decline at a negative single digit growth annually. It has a net cash position of USD306 million. Capex was USD131 million and FCF USD216 million. Going forward, capex is expected to remain at similar elevated levels as Ncell builds data infrastructure to counter the decline from international calling. Ncell has a total of 29MHz of spectrum in the 900, 1800 and 2100 bands all of which fall due for renewal in 2019. Ncell is expected to generate sufficient cash flows to fund the renewal fee (previous fee was ~USD200m). The transaction would be funded with a combination of cash and external debt and is expected to close in 2Q16. Hence, we may see Axiata come back to the USD market in the near future. Holding company cash flows The holding company earns all its operating income in the form of dividends from its operating subsidiaries and associates. Capex for 2015 includes USD125 million for Myanmar tower assets and USD90 million additional investment in Cambodia. The holding company has a high payout ratio and paid out ~USD576 million in dividends in 2014. Figure 4: Cash Flows - Head Office + SPVs USD millions 2013 2014 2015E Dividends received 749 915 550 Net Finance costs (3) (9) (11) Other opex / WC changes (81) (60) (60) Operating CF 666 846 478 Acq / Investments in subs/associates (227) (367) (215) Dividends paid (948) (576) (499) FCF (509) (97) (235) Source: Company data, Deutsche Bank estimates Assuming nil working capital changes for 2015 Axiata’s main subsidiaries have their own cash flow profiles and are largely capable of funding their own capex plans, except Robi which needs holdco funding (USD50-80 million p.a. per our estimates) as it is free cash flow negative. Foreign currency hedging Subsidiary level - Operations at the subsidiaries are primarily in their respective local currencies. All of the debt and cash at Celcom is in local currency. XL Axiata had USD debt which was partly refinanced with local currency debt in 2015 and the remaining external USD debt was fully hedged till maturity. However, there is an inter group loan from Axiata holdco to XL Axiata of USD500 million that remains unhedged. Dialog and Robi have around USD154 million and USD90 million of f/x debt which is unhedged. Holding company - Inflows consist of dividends, primarily from Celcom which is in MYR and its debt consists of USD300 million bonds which are hedged to SGD with cross currency swaps and USD500 million sukuks which are currently unhedged. The group plans to hedge this in future as they have a policy of hedging at least 50% of foreign exchange exposure. Deutsche Bank AG/Hong Kong Page 3 13 January 2016 IG Corporate Credit,Telecommunications Axiata Group Berhad Other issues to keep note of: Celcom - The company is recovering from significant IT issues in 2014 which caused loss of revenue and subscribers. The issues were resolved in 2015 and the subscriber numbers have stabilized in 3Q15, however recovery is yet to be seen. XL Axiata - XL changed its entire strategy in 2015 to focus on mid and high value subscribers as a result of which its subscribers went down from 68 million in 1Q14 to 41 million in 3Q15. However ARPUs (IDR’000) jumped from 23 to 38 over the same period.
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