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The Star Exclusive - A giant plan to unlock value


New chief: Izzaddin (left) and Jamaludin at the briefing. After 12 years as head honcho of Axiata, Jamaludin is calling it a day and Izzaddin will take over the reins next year.

Axiata Group Bhd, the blue-chip regional telecommunications giant, has seen its market capitalisation shrink from RM40bil last year to RM29.34bil currently.

Many reckon that this is due to increasing competition, exposure to regulatory risks and the worry that the Covid-19 pandemic has hit the group more than other telco’s given its regional spread.

Be that as it may, Axiata though is at an interesting turning point that could see it create significant value – its management is busy in talks with potential suitors for possible sales of assets or forming interesting new partnerships that could see it gain ground in some of its new business ventures.

So busy is its management team in these talks that StarBizWeek’s exclusive interview with Axiata’s head honcho Tan Sri Jamaludin Ibrahim had to end earlier than expected as he had to rush back to his office for a meeting with potential suitors.

To be sure, the story of investors pursuing Axiata for strategic stakes in either the holding company or in any of its many units is not a new one. Axiata operates in 11 countries in mobile services, telecommunication tower and digital and fintech sectors, among others.

Strategic investors have already taken stakes in its tower business (edotco Bhd) and digital services (Axiata Digital Services or ADA) which raised billions of ringgit for Axiata.

Strong footing: Axiata is a RM25bil company by revenue, had RM10bil in cash as at end-September, and its cumulative profit since 2008 totalled some RM21.7bil.Strong footing: Axiata is a RM25bil company by revenue, had RM10bil in cash as at end-September, and its cumulative profit since 2008 totalled some RM21.7bil.

The group’s strategic partners include the likes of Great Eastern Assurance, Sumitomo, Mitsui Group, Khazanah Nasional Bhd, Retirement Inc Fund (KWAP), and Innovation Network Corp of Japan.

Strangely though, Axiata’s share price continues to languish. It recently drifted to its 10-year low. However, yesterday, telco stocks enjoyed a slight revival, driven by speculation that Budget 2021 would have incentives to boost the country’s fiberisation plans and perhaps 5G roll out. Axiata’s share price rose the most among the telco stock by 5%, to close at RM3.20 per share with a market capitalisation of RM29.34bil. But that still remains a far cry from its RM40bil market cap a year ago.

“There is a huge disparity in the share price and what Axiata is worth. It is a structural problem and the pandemic has made it worse, ’’ acknowledges Jamaludin.

“Without the pandemic, it would certainly be different. The pandemic has hurt a lot of companies and it is unfortunate that it has happened during my time as head of the group, ’’ he says.

And after 12 years as head honcho of Axiata, Jamaludin is calling it a day.

Datuk Izzaddin Idris will take over the reins next year.

“This is your typical holding company discount. A holding company with the assets and yet our assets are not valued the way they should be, ’’ adds Izzaddin.

The profile of Axiata today is far more different than in 2008, when the group was created as a spin-off from Telekom Malaysia Bhd, points out Jamaludin.

“Each operating unit has grown three to four times larger. Robi in Bangladesh is five times bigger and its profits are eight times higher. Smart in Cambodia’s revenue is 5.8 times bigger than before, while XL in Indonesia is three times bigger in size and its profits have grown by 2.3 times since then, ” explains Jamaludin.

No wonder then that Jamaludin and Izzaddin have crafted a plan to accelerate the unlocking of value for the group, a plan that will span over the next four years. It will be by monetisation of some of the assets, listing other units, and entering into partnerships to create bigger businesses.

Themes playing into this strategy include the consolidation that is already taking place in the telco space and the emergence of 5G. Amidst this, Axiata will pursue strategic partnerships and even consider mergers and acquisitions (M&As) to secure its position in the markets it is in.

“This is necessary, if not critical, or the survival of the business, especially today, to future-proof the business from a medium-term perspective, ’’ Izzaddin, ’’ adds.

Creating value

Jamaludin believes Axiata is able to unlock the value as it has built a “solid foundation’’ that attracts investors.

Axiata is a RM25bil company by revenue, had RM10bil in cash as at end-September, and its cumulative profit since 2008 totalled some RM21.7bil.

“These are well-sought-after assets. If we ask who wants to buy Axiata, we will have a long list of interested parties. Who wants to consolidate with Celcom? Plenty. Who wants to partner with edotco, partner XL... there are many. These are the kind of assets that can turn into big value for others, ’’ Jamaludin says.

But why now? What took Axiata so long to realise this and what is taking them so long to actualise this unlocking of values?

“We have been waiting for the optimum moment to get the maximum value. The group is not short of suitors. In fact, there are a stream of global investors wanting parts of the holding company. They are willing to pay big money for our assets, ’’ Jamaludin says.

Recall that in September last year, Axiata and Norway’s Telenor Asa tried to merge their units but the deal fell through. Had it gone through, it would have created RM9bil more in assets for Axiata.

Asked if the Telenor-Axiata talks are still on, Jamaludin says “no”.

“In the short term, the plan is to monetise two of the companies (edotco and ADS), and in the longer term, we plan to list them (edotco and digital financial services, a unit of ADS). As for Celcom, the best way to extract value is through a consolidation process as the industry needs to consolidate, ” Jamaludin says.

But picking an investor is not easy. “We have to be careful to ensure that we bring an investor that is like minded, that they believe we are good at managing the business and are prepared to put in capital because we have big ambitions, ’’ adds Izzaddin.

Jamaludin also foresees competition heightening as the 5G transition takes place. The industry is also in need of consolidation in Malaysia and Indonesia.

This is because it will be too costly for players to duplicate networks for 5G. The cost is between RM5bil and RM7bil, with long gestation periods and globally players are sharing networks to save cost.

Jamaludin notes that local players are in talks for infrastructure sharing for 5G.

He believes consolidation will shrink the number of cellular players in Malaysia from four to three, with two fixed-broadband players.

That opens opportunities for M&As and Axiata is in a position to undertake them, if the need arises, to maintain its lead position.

“5G is the trigger. We think XL will grow very rapidly, Celcom will transform. We need to future-proof the company beyond two or three years, ’’ Jamaluddin adds.

A recent report by AmInvestment Bank points out that Axiata, being a regional telco operator, has “excellent opportunities to further monetise its assets and engage in M&A activities”. The report added, “It currently trades at a bargain FY (financial year) 2021 enterprise value/EBITDA of 4 times versus Maxis’ 12 times”.

Apart from unlocking value, Izzaddin has plans to improve the operational performance of the group. These plans include improving its cost of “data per gig”, strengthening its fibre connectivity and seizing opportunities in the enterprise and digital segments.But his priority is Celcom Axiata Bhd, once a shining star. Lots need to be done to improve it to prepare for the 5G transition.

“At the end of the day, that’s the biggest needle that’s going to move Axiata’s valuations. Because at every other investor conference or analyst briefing, it’s always about Celcom. Not that the other operating companies do not matter. Perhaps because Axiata is Malaysian-based, we have to be strong in our home base, ’’ Izzaddin says.

Apart from that, he adds that Axiata wants to continue pursuing a digital banking licence to solidify its foothold in the financial services industry through Digital Finance Services, a unit of ADS.

It wants to further grow edotco by buying over 40,000 towers to reach a total of 70,000 towers in four years and be among the top five global tower companies.

“We also have a plan to list the Digital Financial Services unit, ’’ adds Jamaludin.

Upping the dividends

Axiata has paid out RM13.8bil in dividends since 2008. But a review to its dividend policy is needed as it only paid 9 sen a share last year. It pales in comparison to Digi.com Bhd’s 18.5 sen and Maxis Bhd’s 20 sen.

“The industry has evolved, it is plateauing in a sense that revenue growth is in the single digit. Like all industries, which plateau off, investors would expect a dividend income stream from the business. Otherwise why do we exist? So, we are looking to pay high dividends, ’’ Izzaddin says.

“Our target is to at least pay 20 sen per share. Because the peak was 23 sen, so we think 20 sen per share is a good dividend pay-out (in four years).’’

Over the past few years, Axiata’s dividend payout was low in order to conserve cash for spectrum acquisition and regulatory payouts such as licence and tax payments in markets it operate in.

But some analysts are getting positive about the dividend outlook for the group.

UOBKayHian believes the ‘’new management will continue to prioritise near-term profitability versus revenue and market share growth. Together with capital discipline, Axiata is prioritising long-term sustainable cash flow and dividend payout.’’

The research house has a “buy’’ call on Axiata, premised on its attractive valuation, earnings recovery and unlocking of key assets in Malaysia and Indonesia. Its target price is RM3.90 a share.

Interestingly, analysts remain divided on their calls for Axiata.

According to a Bloomberg data, 13 houses have a “buy” call while the same number have put a “hold” on the stock, with one house maintaining a “sell’’.

For Axiata though, cash flow has never been its problem. It has an annual operating cash flow of about RM1.2bil.

“Even the cash flow at OpCos (operating companies) is pretty good. Our challenge is profitability and that is largely due to the high depreciation and amortisation charges that we have to take on, ’’ Izzaddin says.

UOBKayHian says Axiata is on track to achieve its RM5bil cost-savings target (2017-2021) by year-end after delivering RM4.6bil savings to date.

In addition, Axiata aims to save another RM3bil over 2021-2023. The savings will be from network and spectrum optimisation and a reduction in IT, network and procurement activities.

Axiata delivered its best-ever profits of RM1.46bil in 2019, with a revenue of close to RM25bil. Izzaddin is confident that Axiata’s revenue will reach RM30bil by 2024.

Currently the cellular business contributes 90% of its earnings and others including edotco and ADS the remaining 10%. That equation will move to 80:20, respectively, by 2024.

The group’s debt at RM17.8bil is “very manageable” as the average interest rate is 3.3%.

But a word of caution from both the CEOs – higher depreciation is possible even this year if the 3G network shutdown is executed.

“We are looking into our assets and books. We are looking at what needs to be sunset. It is better to be realistic about these things, ’’ Izzaddin says.

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Axiata , Izzaddin , Jamaludin , telecoms , Celcom , assets , monetise ,

   

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