Date: October 14, 2024
Broker: Maybank Investment Bank Berhad
Company Overview
Axiata Group is a government-linked company primarily engaged in telecommunications and digital businesses across Asia. With a significant presence in 10 countries, it operates mobile telcos, network infrastructure, and digital internet companies. The group has demonstrated monetization potential through divesting minority stakes in its digital business arm, which is currently scaling up but remains loss-making. Axiata also has substantial experience in mergers and acquisitions (M&As), although the accretion from these activities has often been mixed.
Balance Sheet and Debt Management
Axiata’s potential for balance sheet repair is seen as a re-rating catalyst. The company’s net debt-to-EBITDA is estimated to improve to approximately 2.6x by the end of Q3 2024, down from 2.8x at the end of Q2 2024, assuming stable EBITDA. A further reduction could bring Axiata closer to its medium-term target of 2.5x net debt-to-EBITDA.
Axiata’s debt portfolio at the end of Q2 2024 was diversified across multiple currencies, with 56% denominated in USD and 7% in MYR. With the MYR strengthening by about 10% against the USD, the company expects a reduction in its debt burden in MYR terms. The stronger MYR could also result in a non-core translation gain in Q3 2024, despite an overall negative impact on earnings due to its exposure to foreign currencies.
Earnings and Operational Outlook
Axiata’s core earnings are significantly impacted by currency fluctuations, with about 90% of EBITDA and 50% of core net profit sourced from its foreign operations. Despite the strengthening of the MYR, Axiata requires organic growth to counteract adverse currency impacts on its earnings.
While the company maintains a minimum dividend of 10 sen per share annually, the operational outlook remains challenging due to risks in Bangladesh, where its subsidiary Robi could face political and environmental headwinds. Axiata’s largest earnings contributor is its associate CelcomDigi, which also plays a major role in its sum-of-parts (SOP) valuation.
ESG Initiatives
Axiata is considered an above-average performer in terms of environmental, social, and governance (ESG) factors, scoring 68/100 according to the Maybank proprietary ESG matrix. The company faces minimal environmental risks, as telco operations are not energy- or emission-intensive. Nevertheless, Axiata has committed to a “Zero by 2050” carbon emission target, in line with industry standards. However, this could be a challenge given its operations in growing markets where network expansion continues.
Axiata has undertaken several initiatives to reduce its environmental footprint, including transferring sites from diesel to grid power, installing energy-efficient equipment, and building renewable energy capacity through its tower arm, edotco. Additionally, Axiata has invested in digital inclusion and rural connectivity, addressing major social issues such as access to essential services and financial platforms in underdeveloped markets.
Financial Performance (FY22 – FY26E)
Axiata’s financial performance has seen varied results across recent years, with revenue expected to decrease by 2.0% in FY24E before rising by 3.1% in FY25E. EBITDA is projected to grow by 9.1% in FY24E, reaching MYR11.5 billion, supported by cost management and operational efficiency.
The company’s core net profit is forecast to grow significantly, from MYR683 million in FY24E to MYR1.5 billion in FY26E, driven by improving margins and a reduction in debt. Its dividend payout ratio is expected to stabilize around 4.1% across FY24E to FY26E.
Key Financial Metrics
- Revenue: MYR23.0 billion (FY24E)
- EBITDA: MYR11.5 billion (FY24E)
- Core Net Profit: MYR683 million (FY24E)
- Net Debt-to-EBITDA: 2.6x (end-Q3 2024 estimate)
- Free Cash Flow Yield: 21.3% (FY24E)
Major Shareholders and Market Capitalization
- Khazanah Nasional Berhad: 36.7%
- Employees Provident Fund: 18.5%
- Permodalan Nasional Berhad: 16.9%
- Market Capitalization: MYR22.1 billion
Risks
Axiata faces several risks that could impact its financial performance, including competitive pressures in pricing, regulatory challenges such as spectrum fees, and currency fluctuations. The political and environmental landscape in Bangladesh remains a near-term risk, potentially affecting its operations through its subsidiary Robi.
Price Target and Valuation
Maybank Investment Bank has reiterated its BUY rating on Axiata, with a target price of MYR3.20, representing a potential upside of 36%. The valuation is based on a sum-of-parts (SOP) methodology, where each operating company is valued based on discounted cash flow (DCF).
