Malaysia Company Guide Axiata Group Version 15 | Bloomberg: AXIATA MK | Reuters: AXIA.KL Refer to important disclosures at the end of this report DBS Group Research . Equity 16 Jan 2020 BUY (Upgrade from Hold) Improving prospects Last Traded Price ( 15 Jan 2020): RM4.16 (KLCI : 1,585.14) Price Target 12-mth: RM4.80 (15% upside) (Prev RM4.60) Upgrade to BUY with revised RM4.80 TP. Following the termination of its merger discussion with Telenor, Axiata’s share Analyst price has retracted by 21% from its recent peak. At the current Woo Kim TOH +60 32604 3917 [email protected] price, we think the risk-reward profile for Axiata is attractive, What’s New with a valuation of 6.1x FY20 EV/EBITDA (-1SD below the 5-year average). Improvement in Celcom’s performance remains the Favourable scenario for 5G spectrum auction in key driver for Axiata’s earnings, and we view this positively in Malaysia as MCMC adopts consortium approach to light of muted risks for 5G spectrum and capex in Malaysia. The promote network sharing among operators potential monetisation of tower and/or digital assets will be a Some positives on Nepal CGT issues with favourable bonus, if it materialises. We upgrade our recommendation to ruling from international arbitration court BUY with a revised SOP-based TP of RM4.80. Attractive risk-reward after recent correction; upgrade Where we differ: We are more optimistic on Celcom’s to BUY with revised SOP-based TP of RM4.80 turnaround. Axiata’s share price is highly correlated to Celcom’s performance, as the latter contributes >50% of group earnings and SOP valuation. We believe consensus is still cautious about Price Relative near-term earnings weakness at Celcom. Potential catalysts. A strong pick-up in Celcom’s performance will be the key catalyst for a potential re-rating of the stock. The IPO of Axiata’s tower arm, edotco should also boost sentiment and provide price discovery for the business unit. Valuation: Forecasts and Valuation Our RM4.80 TP for Axiata is based on SOP valuation. FY Dec (RMm) 2018A 2019F 2020F 2021F Revenue 23,886 24,562 25,388 26,321 EBITDA 4,987 8,853 9,315 9,938 Key Risks to Our View: Pre-tax Profit (4,346) 2,125 2,416 2,867 Regulatory and competition risks. Intense competition and Net Profit (5,035) 1,009 1,222 1,481 unfavourable regulatory environment are key risks for Axiata in Net Pft (Pre Ex.) 1,010 1,009 1,222 1,482 countries that it operates. Net Pft Gth (Pre-ex) (%) (16.2) (0.1) 21.1 21.3 EPS (sen) (56.1) 11.2 13.6 16.5 EPS Pre Ex. (sen) 11.3 11.2 13.6 16.5 At A Glance EPS Gth Pre Ex (%) (16) 0 21 21 Issued Capital (m shrs) 9,164 Diluted EPS (sen) 11.3 11.2 13.6 16.5 Mkt. Cap (RMm/US$m) 38,120 / 9,364 Net DPS (sen) 9.50 9.56 11.6 14.0 Major Shareholders (%) BV Per Share (sen) 195 196 199 201 Khazanah 44.5 PE (X) nm 37.0 30.5 25.2 EPF 14.0 PE Pre Ex. (X) 37.0 37.0 30.5 25.2 P/Cash Flow (X) 6.1 4.9 5.0 4.7 Skim ASB 8.5 EV/EBITDA (X) 11.4 6.4 6.1 5.7 Free Float (%) 55 Net Div Yield (%) 2.3 2.3 2.8 3.4 3m Avg. Daily Val (US$m) 2.8 P/Book Value (X) 2.1 2.1 2.1 2.1 GIC Industry : Communication Services / Telecommunication Services Net Debt/Equity (X) 0.6 0.6 0.5 0.5 ROAE (%) (23.9) 5.7 6.9 8.3 Bloomberg ESG disclosure score (2018)^ 37.6 Earnings Rev (%): 0 0 0 - Environmental / Social / Governance Consensus EPS (sen): 11.6 14.2 16.7 20.9 / 47.4 / 66.1 Other Broker Recs: B: 8 S: 1 H: 18 Source of all data on this page: Company, AllianceDBS, Bloomberg ^ refer to back page for more information Finance L.P ed: CK/ sa: WMT, PY, CS Company Guide Axiata Group WHAT’S NEW Attractive risk-reward profile Favourable scenario for 5G spectrum auction in Malaysia: For for improvements as its current EBITDA margin of 38% is still 5G spectrum, the regulator MCMC (Malaysia Communication below peers’ margins of 49-54% (post-MFRS 16). and Multimedia Commission) has indicated that it will award Some positives on Nepal tax issue: On 19 Dec 2019, Axiata a combined spectrum in the 700MHz and 3.5GHz bands to a confirmed that the International Centre for Settlement of single entity, comprising a consortium formed by multiple Investment Dispute (ICSID) has granted a provisional licensees. The intention is to promote network sharing among measures order in favour of Ncell for the arbitration the telecom operators in order to minimise capex costs and proceedings regarding the on-going capital gain tax (CGT) avoid duplication of infrastructure. issues. The interim order restrains the Nepalese government We believe this outcome is favourable for Malaysian telcos from demanding Ncell to pay NPR22.4bn (about RM807m (including Celcom), as potential spectrum and capex risks for equivalent) in outstanding CGT. 5G is significantly lesser now. It also helped to eliminate To recap, Axiata was slapped with a CGT bill of NPR62.6bn market speculation that all 5G spectrum could be allocated to following its USD1.4bn acquisition of an 80% stake in Ncell a single telco (i.e. Telekom Malaysia) to build a wholesale 5G from TeliaSonera Norway. The amount was reduced to national network for the country. NPR45bn, after a favourable ruling from Nepal’s Supreme Celcom is in a good position: We believe Celcom and Maxis Court in April 2019. Axiata had previously paid about will likely partner together to form a consortium, given that NPR23bn to the tax office. they already have an existing memorandum of understanding Upgrade to BUY with revised RM4.80 TP. Following the (MoU) to explore active 5G RAN (radio access network) termination of its merger discussion with Telenor, Axiata’s sharing. If we include DiGi and/or even TM into the picture, share price has retracted by 21% from its recent peak. At the this will make the consortium the favourite contender to win current price, we think the risk-reward profile for Axiata is under the beauty contest process, as other possible attractive, with a valuation of 6.1x FY20 EV/EBITDA (-1SD consortiums’ proposal will likely look pale in comparison. below the 5-year average). Improvement in Celcom’s Overall, we expect incumbents to work more closely together performance remains the key driver for Axiata’s earnings, and going forward in order to achieve MCMC’s key targets under we view this positively in light of muted risks for 5G spectrum the 5-year National Fiberisation and Connectivity Plan (NFCP). and capex in Malaysia. The potential monetisation of tower In our opinion, this should foster rational competition among and/or digital assets will be a bonus, if it materialises. We the players and help to keep data pricing stable. upgrade our call to BUY with revised SOP-based TP of RM4.80. Cost reduction to drive better margins: Amid the benign competition in Malaysia mobile market, we believe Celcom Slight revision in SOP-based TP. We revise our TP for Axiata to should be able to keep its service revenue stable (1-2% RM4.80 (from RM4.60) after updating for; 1) Lower risk-free annual growth over FY20-22). Much of the improvement in rate for Celcom (from 4.0% to 3.5%) in line with 10-year profitability is expected to come from cost efficiency MGS yield; 2) DBS TP for XL Axiata; and 3) Latest share price initiatives, particularly on network costs reduction. Celcom for Robi and Vodafone-Idea. targets to increase its EBITDA margins by 3-4% points by 2022, which we think it’s conservative. There is a lot of room SOP Valuation Subsidiaries Valuation Method Effective Valuation Valuation Per Axiata stake (RMm) per share share Celcom DCF (WACC 7.0%, TG 1.5%) 100.0% 25,225 2.86 XL DBS TP 66.6% 7,122 Rp4,180 0.81 Ncell 6x CY20 EBITDA 80.0% 6,624 0.75 Dialog Market Price 83.3% 2,308 Rp12.6 0.26 Robi 6x CY20 EBITDA 68.7% 2,759 0.31 Vodafone-Idea Consensus TP 1.6% 196 Rs. 7.0 0.02 Smart 6x CY20 EBITDA 82.5% 2,357 0.27 Total value of subsidiaries 46,591 5.28 Holding company net cash (debt) (4,229) -0.48 Total equity value 42,362 4.80 Source of all data: Company, AllianceDBS Page 2 Company Guide Axiata Group Revenue contribution (in RM m) CRITICAL DATA POINTS TO WATCH 30,000 Celcom XL Axiata Ncell Dialog Robi Smart & Others Celcom is the key contributor. Teething IT issues prevented Celcom 25,000 from launching new plans in 2014 and this affected dealers’ confidence. These issues were finally resolved by 2Q15 after some 20,000 delays, but the damage was already done. This was reflected in the decline in subscriber base FY14-17. To regain momentum, Celcom 15,000 was more aggressive in the market in 1H15 and initially showed 10,000 some positive results. However, rivals responded with aggressive pricing, leading to a net churn in Celcom subscribers as well as 5,000 decline in average revenue per user (ARPU) by end-2016.