Axiata dials down to attractive valuations

Year-to-date (ytd), Axiata shares are down 28%, translating to a loss of about RM10bil in market capitalisation, or from the RM4.14 it was at the year’s start.

AMONG the handful of stocks in the telecommunications circle, Axiata Group Bhd stands out because its shares have been trending southwards, touching a ten-year low of RM2.88 this week.

While prices have inched up to RM2.98 on bargain-hunting yesterday, they are trading at undemanding valuations, which were last seen during the global financial crisis of 2009.

Year-to-date (ytd), Axiata shares are down 28%, translating to a loss of about RM10bil in market capitalisation, or from the RM4.14 it was at the year’s start.

Peers in the industry have fared better, albeit also trading lower since the start of the year. Bhd shares are down about 7% ytd, while Maxis Bhd is 2.6% down ytd.

Valuation-wise, the group with extensive operations in 10 countries across Asia looks attractive. “It’s a bargain now, ” concurs one analyst who has a buy on the stock. However, he does not want to say whether the stock can dial up investor interest soon.

“Sentiment on Axiata was partly affected by its dismal second-quarter financial year 2020 (2Q20) earnings. If it can deliver on this front, there could be a meaningful recovery, price-wise, ” he says.

Going by Bloomberg data, analysts appear to be divided on their rating. There are 12 buy calls, 14 hold calls and one sell.

Other than stiff competition on the homefront, the analyst says some of the telco’s overseas operations could also be under pressure. For example, the Bangladesh tax issues weigh on the group’s plans to unlock value via the initial public offering (IPO) of 68.7%-owned Robi Axiata on the stock exchange there.

“Then, there are regulatory developments pertaining to spectrum fees and product pricing. All these pose a risk to Axiata’s earnings, ” he says. These issues, he adds, are quite known to investors, especially institutional ones.

Another factor that could have shaped investors’ decision is the lower dividend of two sen for the six-month period ended June 30 (1H20) as compared to the five sen dished out a year ago. This could have prompted investors to seek out other stocks offering higher dividends in the current low interest rate climate.

Besides Khazanah Nasional Bhd that holds 37.2%, the other major shareholders of the company are the Employees Provident Fund and Permodalan Nasional Bhd with 17.8% and 11.9% stakes, respectively.

Quarter-on-quarter (q-o-q), Axiata’s 2Q20 underlying earnings dropped 63% to RM45mil on the back of a 4% revenue contraction to RM5.8bil. This was largely due to weak contributions from Nepal-based Ncell, Malaysia’s Celcom and Sri Lanka’s Dialog, analysts note.

Of the three, Ncell was the hardest hit with a 21% q-o-q revenue decline. Locally, Celcom’s 2Q20 service revenue fell 4.1% q-o-q with both prepaid and postpaid posting lower average revenue per user. Despite higher data usage, the government-mandated free data offer of 1GB per day during the movement control order had resulted in revenue foregone.

On the other hand, Indonesia’s XL Axiata delivered a commendable performance in 2Q20, with revenue growth and margin expansion resulting in a q-o-q doubling of core net profit.

On whether Axiata’s share price has bottomed, Fortress Capital Asset Management’s chief executive officer Thomas Yong says this would depend on the pace of recovery for each of its market’s industry dynamics, taking into account competition and data monetisation pace.

On a brighter note, Yong feels that Axiata’s exposure to regional frontier and emerging markets serves as a potential diversification as compared to the other telco players in Malaysia.

“These markets will serve as its growth driver, predominantly XL Axiata in Indonesia, which showed signs of a data monetisation cycle and we expect it to gain market share ex-Java, ” he tells StarBizWeek.

Yong notes that Axiata is currently trading at five times the 2021 estimated enterprise value/earnings before interest, taxes, depreciation and amortisation (EV/Ebitda) – a 28% discount to the long-term EV/Ebitda average of seven times.

“Axiata’s outperformance over its peers would be driven by near-term accelerating earnings from both local and frontier markets and its long-term multiple expansion as more earnings certainty surfaces, ” he says.

According to him, frontier markets like Sri Lanka and Bangladesh should contribute decent Ebitda growth in the future.

Locally, mobile competition in Malaysia is unlikely to dissipate in the near term, according to him, as data monetisation efforts are derailed by unlimited data plans.

On 5G, he thinks it will only be introduced in 2021-2022. But this implies a heavy capital expenditure (capex) burden in the next two to three years, considering that 5G capex is heavier in the initial years of rollout, he adds.

With Robi’s proposed IPO in Bangladesh, slated for 4Q20, analysts believe this may spur other asset monetisation elsewhere to cut its high net debt/Ebitda of 1.6 times.

This would also be in line with Axiata’s longer-term strategy to transition into a dividend yield company over the next three to five years versus that of a growth story in emerging markets on the back of rising competition and investor expectations.

In a briefing with analysts in late August, Axiata shared the view that “consolidation amongst players is inevitable in Indonesia and Malaysia, given the intense competition, costly spectrum renewal requirements and capex intensity”. Recall that in September last year, Axiata and Digi’s largest shareholder, Telenor ASA, mutually called off talks to merge their Asian telco operations.

Come year-end, Axiata’s long-serving head honcho, Tan Sri Jamaludin Ibrahim, will be retiring. The current deputy group CEO, Datuk Mohd Izzaddin Idris, who was formerly the UEM group chieftain, will take over the helm and has the tough task of re-connecting investors with the stock at a very challenging time.

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