Axiata Group Bhd has spent a large amount of money expanding its businesses in the markets it wants to be in. In having a bigger footprint, the regional cellular phone company will be investing more money on maintaining and growing its infrastructure from Nepal to Indonesia.
The bold moves by the company, with the latest being the acquisition of Nepal’s No.1 cellular company Ncell, has got the industry buzzing. But what has not happened is excitement being translated into its share price.
For the past three years, Axiata’s share price, along with other comparable companies such as Singapore Telecommunications Ltd (SingTel) and Telenor ASA, has not really performed.
Axiata’s share price gain was only 1%, versus the 36% and 30% rises recorded by the share prices of Telenor and SingTel, respectively.
“It has not been a smooth journey for Axiata, as it has been caught off guard in some markets due to regulatory, currency and competition issues. Locally, it is a big proxy stock which we cannot be not weighted on. For us, this is also the only local telco with regional exposure,” says an industry analyst who has a “neutral” call on the stock.
Axiata’s share price has remained within the RM5-RM7.20 band since April 2013.
It closed at RM5.90 yesterday, up two sen, but year-to-date it is 7.8% down, partly due to the proposal by the Government to auction spectrum, which may force it to come out with more money in the future.
Although its yearly returns have been steady in some markets, there has not been superb returns from all these investments regionally.
“There has been a bit of a gestation period for returns in some markets after all the investment, and some are small markets. But XL in Indonesia and Dialog in Sri Lanka are contributing,” he says.
He adds that Celcom Axiata Bhd, which has been the cash cow for Axiata, has had its own fair share of issues the past 18 months. And although it is coming back to the market, it remains to be seen how much more it can contribute to Axiata.
Axiata Group managing director/president and CEO Datuk Seri Jamaludin Ibrahim says that the contribution towards revenue from Celcom will be about 40% this year, and mid-30% from XL of Indonesia, and 10% each from Dialog and Ncell.
Axiata finalised the purchase of an 80% stake in Nepal’s Ncell this week, an investment that Jamaludin adds “the accretion from Ncell to Axiata’s financial is immediate”.
The analyst adds that the dynamics for Axiata in many markets are different although people compare it with SingTel, which is far ahead. SingTel’s footprint is wide, however, it does not take controlling positions in the markets it is in unlike Axiata.
“It has come a long way and our long-term view is that it is a growth stock. It is growing organically and also inorganically, although in some markets growth is saturated,” he adds.
He says since its inception, Axiata has wanted to be a regional champion and it has achieved that with a footprint in 10 countries – Pakistan, India, Bangladesh, Sri Lanka, Myanmar, Cambodia, Indonesia, Singapore, Malaysia and recently Nepal. With Ncell, its subscriber base swells to 290 million subscribers in the 10 markets, some of which are saturated while others are emerging and frontier.
“But the next wave is about unlocking value in its units, like edotco and Celcom Axiata,” says the analyst.
Axiata recently announced plans to list its tower business company edotco over the next one year to 18 months.
To a question if its Malaysian unit, Celcom Axiata Bhd, will return to the capital markets, Jamaludin says “to list Celcom will make Axiata fairly redundant.”
Axiata will continue to spend to grow its business and buy new assets. This year, it will pump in a whopping RM5.7bil on capital expenditure (capex), which is a lot higher than the RM4.8bil it spent last year.
This is the highest amount ever spent, as it has factored in the acquisition of Ncell. The bulk of its capex would be used for network development, an analyst says.
It also paid out RM6.5bil to snap up assets like Ncell and others last year.
“Last year was big for mergers and acquisitions since Axiata’s inception seven years ago,” says Jamaludin.
Jamaludin adds that in 2017 and 2018, Axiata needs to spend RM4bil to RM6bil in capex each year.
No matter what the market says, Axiata is still open to acquisitions but Jamaludin feels there are more opportunities at a country level in terms of consolidation.
One example was the merger of Robi Axiata Ltd and Airtel Bangladesh Ltd in Bangladesh, which pushed Robi to become the second-largest player from No. 4.
“The missing link (in our footprint) is Thailand and the Philippines, but it would not be attractive for us to be the No. 4 player in any market.
“We are in Asean and South Asia, that’s our footprint. We have not spent a ringgit out of that footprint and all will be in those areas,” he adds.
Jamaludin says: “We are open to acquisitions but our prime focus will be on consolidation.”
With all the funding requirements, is Axiata over-stretched financially?
“The funds are internally-generated. We can fund all these (acquisitions and capex requirements) internally,” Jamaludin says.
“For years our balance sheets post Idea in India was so strong to the point that our gross debt is only RM2.1bil to RM2.2bil, which is very healthy. We have almost always have RM4bil to RM6bil cash in hand.
“Why it was brought to spotlight recently was because we issued a cheque of nearly RM6bil for Ncell. Of course, there will be a little stress... it is almost a given thing. To ease that, we increased our debt a bit to support that but knowing fully well that Ncell generates a lot of cash at the same time,” he says.
As of end-2015, Axiata has RM5.5bil in cash.
To conserve its cash it issued the US$500mil 10-year sukuk and got good response to fund its acquisitions.
Jamaludin is pretty excited about the prospects of Ncell, as to him “Ncell is a company we can do with. It makes good financial sense as it adds significant growth to Axiata”.
Based on the 2015 proforma, the uplift in revenue from Ncell will be 11%, 19% on Ebitda and 13% on profit after tax and minority interest (Patami) and that works out to about RM2.25bil in revenue, RM1.388bil in Ebitda and RM319mil in Patami, he adds.
Kenanga Research says it remains positive on the Ncell purchase, as it believes it will provide immediate earnings accretion to Axiata.
“On top of that, Ncell’s strong cash-flow generation with free cash flow (FCF) of 22 billion Nepalese rupees (or US$217mil) in FY15 to July is well-positioned to support Axiata’s dividend policy moving forward,” the research house adds.
Ncell is the biggest player in the Nepalese market and Kenanga says that increasing competition, currency fluctuations and regulatory challenges will continue to be key challenges faced by Axiata’s operational companies.
In terms of revenue generation, however, Celcom is the biggest contributor and will retain its dominance for a long time. Nonetheless, the other units such as XL in Indonesia and Dialog in Sri Lanka are contributing increasingly towards its earnings.
For 2015, about 41% of Axiata’s revenue came from its unit Celcom, 34% from XL and 10% from Dialog.
Since the Ncell purchase was completed sooner than expected, Kenanga says it has raised its FY16 estimated turnover/Ebitda by 2.8%/1.1% after factoring in a higher turnover/Ebitda contribution from Ncell (RM1.9bil/RM956mil vs RM1.3bil/RM654mil previously).
However, it adds that the FY17 earnings estimates remain unchanged.
For full-year 2016, Bloomberg’s consensus net profit for Axiata is RM2.55bil, with revenue at RM21.48bil, Ebitda at RM8.1bil and earnings per share (EPS) at 29 sen.
For 2017, Kenanga has forecast a net profit of RM2.970bil, sales of RM22.84bil and an EPS of 33.8 sen.
For 2015, Axiata reported RM19.8bil in sales, a net profit of RM2.56bil and an EPS of 23.8 sen per share.
Since the Ncell acquisition, most research houses have retained their recommendations, with 22 houses having a “hold” call on the stock, six with “buy” calls, and no “sell” calls. The 12-month target price taken from Bloomberg’s consensus is RM6.21 a share.
Axiata according to an analyst is a dividend play since the share price appreciation is slow.
For last year it is paying 20 sen per share in dividend, which is two sen lower from a year earlier. Other telcos in the country have also lowered their dividend payouts, with Maxis Bhd cutting its by half to 20 sen from 40 sen in the preceding year.
In terms of gross dividend yields, Axiata’s is 3.74%, but SingTel, Telenor and Digi’s is higher at 4.57%, 5.16% and 4.64%, respectively, while TM’s is at 3.19% and Maxis Bhd at 3.33%.
Axiata is the fifth-largest player in terms of revenue in Asia after India’s Bharti Airtel and Norway’s Telenor and two others. In terms of customers, it is second after SingTel, and third is Bharti Airtel. Axiata has 275 million customers in the 10 markets it is in, SingTel (507 million).
But times are changing and so are consumer needs. The days of voice and SMS are long gone although in some markets where it operates, voice is still in vogue. However, data and content is increasingly a revenue generator.
For Axiata to tap future growth, it needs to transform itself so that it is not just a digital company that has its systems in place but is also able to capture a large chunk of the content market which it has little or no access to. But Axiata is not alone as globally, traditional telcos are being challenged by these new players that are using traditional networks to push content that consumers want and it is this business that companies like Telenor and Axiata want to claim a stake. They do not want to remain dump pipe providers but top it with content and expand their revenue streams in the future.
Shaping with the net
Even Telenor’s group CEO Sigve Brekke said recently that he was turning the Norwegian giant around into a digital company to tap into opportunities in the digitalised world.
“The whole global industry is going through a turmoil, and I deliberately use the word turmoil, as there are many moving parts,” Jamaludin says.
Apart from paying RM5.5bil for Ncell, the other acquisitions made last year were for the tower business in Myanmar via its unit, edotco, Axiata also bought five companies related to the Internet of things. It also entered into a collaboration via Celcom Axiata with TM/Packet One for fibre to home and mobile virtual network operator.
The five digital companies Axiata bought into are Yonder for music, FreedomPop (over the top), WSO2 Telco (platform), Adknowledge and Komli, both advertising companies.
These companies will give Axiata the flexibility to provide content in various forms on top of mobile access.
For Axiata, buying up Internet companies, forming partnerships to sharing infrastructure is the way to go. It now has 11 Internet-type companies within its fold and a deal with TM to get into the fibre-to-home business so that in Malaysia, its unit Celcom Axiata can push content to users and not remain a mere mobile company.
All this is part of Jamaludin’s way to lay the new building blocks for Axiata.
To be able to fully tap this growth, Axiata would need to transform its core networks, which is being done in stages.
For the sharing of infrastructure, it has set up edotco to offer tower services not just to its own companies within the group but also to others and that in itself is a new profit centre for Axiata.
Bundling to converging and working with partners to be able to provide a full suite of services is something he is working on now.
“We have not done much in the Internet of things, which is a high growth area,” Jamaludin says.
The future is all about delivering what the consumer wants, and companies like Axiata have to segmentise, bundle and push exactly what the consumer wants. To Jamaludin, that is where his focus is so that the Axiata of today is transformed to benefit from the future wave where the digitalisation and Internet of things will dominate.
“What is clear is that telcos like us will remain the dominant players to provide connectivity, but to what extent and how we want to expand will remain to be seen as the jury is still out there.
“Directionally, we will be there with the options we need to move to the right path,” he adds.
Jamaludin says whatever he does he has to think about the nearly the 300 million customers across 10 countries that Axiata can serve. That is his and Axiata’s biggest challenge so that they do not miss the big wave of growth that the future holds.
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