A Comprehensive Analysis of Axiata Group Berhad’s Strategic Moves and Financial Outlook
Date: Thursday, 12 December 2024
Broker: UOB Kay Hian
Introduction
In the ever-evolving telecommunications sector, Axiata Group Berhad stands out as a dynamic player poised for significant transformation. This report delves deep into the strategic maneuvers, financial prospects, and market implications of Axiata’s latest activities, particularly focusing on its proposed merger in Indonesia. With a consistent “BUY” recommendation and a target price of RM2.90, Axiata presents a promising opportunity for investors seeking growth in a consolidating market.
Company Overview
Axiata Group Berhad, a prominent mobile operator, has consistently demonstrated resilience and adaptability in the competitive landscape of the communication services sector. With a substantial market capitalization and a diverse shareholder base, including Khazanah Nasional Bhd and the Employee Provident Fund, Axiata is well-positioned to leverage its strengths for future growth.
Merger of XL Axiata and Smartfren in Indonesia
Axiata’s strategic decision to merge XL Axiata and Smartfren in Indonesia marks a pivotal moment for the company. This merger will create an entity valued at US\$6.5 billion, with Axiata owning 34.8% post-merger. The transaction includes a cash inflow of US\$475 million to equalize shareholdings with Sinar Mas, the shareholder of Smartfren. The merger is expected to conclude by the first half of 2025, with Axiata aiming to reduce its net debt/EBITDA ratio from 2.6x to 2.5x through this strategic move.
Value Accretion and Financial Impact
The merger is anticipated to generate value accretion of approximately US\$0.2 billion (around RM0.8 billion) for Axiata. The company’s initial investment in XL Axiata, amounting to RM6.3 billion from 2008 to 2020, will see its value rise to US\$1.4 billion post-merger. Although earnings accretion is minimal, with an estimated 3% increase in net profit, the long-term benefits of cost efficiencies and improved economies of scale are expected to yield US\$300-400 million in pretax savings annually.
Indonesia’s Market Consolidation
This merger positions XLSmart as Indonesia’s third-largest telecommunications player, capturing a 27% market share of subscribers. The consolidation is expected to enhance market dynamics, with XL Axiata’s subscriber base expanding from 58.6 million to 94.5 million. The merger will also enable XLSmart to achieve greater scalability through an increased spectrum holding, allowing for improved network quality and customer service.
Environmental, Social, and Governance (ESG) Initiatives
Axiata’s commitment to sustainable practices is evident in its ESG initiatives. The company aims to achieve net-zero emissions by 2050 and has already introduced hybrid solar technology at 30 sites. Socially, Axiata is fostering a future-ready mindset among employees through Organisation 5.0 and aims for 30% women’s representation in senior management by 2025. Governance practices are robust, with over 90% training completion for anti-bribery, anti-corruption, and data privacy.
Financial Projections and Key Metrics
Looking ahead, Axiata’s financial projections indicate steady growth in net turnover and EBITDA, with a focus on maintaining profitability and reducing debt. The company’s balance sheet reflects a prudent approach to financial management, with a strategic focus on optimizing cash flow and managing liabilities effectively.
Conclusion
Axiata Group Berhad’s strategic initiatives, particularly the merger of XL Axiata and Smartfren, underscore its commitment to growth and market leadership. With a clear focus on value creation, operational efficiency, and sustainable practices, Axiata is well-positioned to capitalize on the evolving telecommunications landscape. Investors are encouraged to consider the “BUY” recommendation, as Axiata continues to navigate the complexities of market consolidation with strategic foresight and financial acumen.
