Axiata’s costly ventures

An analyst says the investments into the frontier markets have added pressure on Axiata’s cash flow as the investments have yet to yield the returns as expected.

Axiata Group Bhd’s decision to exit some of its risky frontier market investments is a valuable lesson not only to corporate Malaysia, but also the government as the biggest shareholder of the telecommunication giant.

Last December, Axiata walked out of Nepal at a loss, complaining about unfair taxation and unfavourable foreign investor protection.

About two months later, it announced its plan to leave conflict-stricken Myanmar within a year, citing worsening macroeconomic parameters and business conditions.

While the decisions may provide relief to Axiata’s minority shareholders, one wonders on what basis the investments were approved in the first place over the past decade, considering the risks associated with frontier markets.

More importantly, why did the major shareholders such as Khazanah Nasional Bhd, the Employees Provident Fund (EPF) and Permodalan Nasional Bhd (PNB) give the greenlight for the investments?

An analyst tells StarBizWeek that the investments into the frontier markets have added pressure on Axiata’s cash flow as the investments have yet to yield the returns as expected.

“It is also a lost opportunity cost because the money would have been better invested in other markets with lower risk profile. Had this been done, the value of Axiata would have gone up,” says the analyst.

It is noteworthy that Axiata’s market capitalisation has slumped by 58% or over RM36bil since the peak share price in November 2014.

Khazanah, Malaysia’s sovereign wealth fund, has held on to its stake over the years despite the protracted drop in Axiata’s share price. The talks to sell a substantial portion of its stake to China Mobile or Norway’s Telenor have collapsed in the past.

Currently, Khazanah owns a 36.7% equity interest in Axiata, followed by EPF (17.9%) and PNB via Amanah Saham Bumiputera (15.3%).

The decision to exit the two frontier markets – Nepal and Myanmar – came at a big cost for Axiata as the group had to undertake massive impairments.

In the financial year ended Dec 31, 2023 (FY23), Axiata recorded an impairment of assets of mobile operations in Nepal worth RM1.51bil and an impairment of assets of infrastructure segment in Myanmar amounting to RM887.9mil.

These impairments dragged the telecommunication giant into the red, with a net loss of almost RM2bil in FY23.

It is undeniable that frontier markets offer huge growth opportunities. The icing on the cake is that these markets may not have many established competitors, hence lowering the barrier to entry.

Frontier markets are those countries that are too small, risky, or illiquid to be known as an emerging economy.

However, one should note that frontier market investments may take longer than expected to yield the projected return, especially for industries like telecommunication where slow infrastructure development can hamper growth.

Policy instability and regulatory issues further add pressure on business operations.

In the case of Axiata, it took a big hit after the Nepalese government imposed capital gains tax (CGT) for the acquisition of Ncell, the largest mobile network operator in the country.

However, Axiata and Ncell had argued that Nepal’s former prime minister KP Sharma Oli allegedly assured them that CGT would not be applicable when Axiata was preparing to buy Ncell in 2015.

From Axiata’s perspective, this was a case of a government not honoring its promise to a foreign investor.

Recall that Axiata UK acquired an indirect 80% shareholding in Ncell from the Swedish TeliaSonera.

The dispute between Axiata and the Nepalese government ended in an international arbitration initiated by the former, which ultimately decided that the government has not erred in imposing the CGT.

Following this, in December 2023, Axiata inked an unconditional sale and purchase agreement with Spectrlite UK Ltd to sell the 80% stake to the latter.

The deal, however, could still be blocked by the Nepalese National Telecommunications Authority, on the basis Axiata has not notified the regulator of the Ncell sale.In January this year, the inquiry team formed to study the controversial Ncell sale said it found faults in the deal, including “unnatural” professional value of the transaction. The report has since been sent to the Nepalese prime minister.

Meanwhile, in Myanmar, Axiata is looking to dispose of its telecommunication tower business as part of its de-risking efforts.

Kenanga Research analyst Kylie Chan Sze Zan said in an earlier note that Axiata’s decision to exit is attributed to environmental, social and governance concerns.

It is noteworthy that Myanmar is now ruled by a military regime following a coup in 2021 that overthrew Myanmar’s democratically elected government.

However, Chan pointed out that the Myanmar tower business remains highly profitable, with an earnings before interest, tax, depreciation and amortisation margin of 85%.

In addition to Nepal and Myanmar, Axiata had also faced regulatory issues in Pakistan some years back.

In 2018, the group scrapped its US$940mil deal to buy 13,000 telecom towers in Pakistan after regulators there kept delaying necessary approvals.

Had the deal gone through, it would have made Edotco - Axiata’s telecom tower unit – the second-largest multi-country tower operator globally and the eighth-largest independent tower firm.

Currently, out of its total portfolio of 58,000 towers, Edotco owns about 2,000 towers and manages 1,000 sites in Myanmar. This translates to 3% to 4% of Axiata’s assets.

Putting aside the bad experiences Axiata had in these countries, it does not negate the fact that expansion into more stable, pro-business countries would provide better business clarity.

For example, Axiata had a good run in Singapore when it held a 28.7% stake in M1 Ltd, a major telecommunication player in the city state.

In 2019, Axiata accepted a RM1.65bil buyout offer from the Singapore telco’s investors Keppel Corp and Singapore Press Holdings for the stake.

It netted an estimated gain of RM126.5mil, in addition to the RM1.1bil dividend Axiata enjoyed throughout the 10 years it invested in M1.

Having gone through these investments over the past many years, Axiata perhaps has a better clarity on the suitable markets to invest in.

In fact, instead of venturing into new markets, Axiata is in the midst of consolidating its telecom footprint and has now shifted its focus on strengthening value creation.

This includes improving its average revenue per user, delivery of merger synergies at CelcomDigi, and the transformation at XL and Link Net.

In addition, Axiata’s tower business – Edotco – remains in expansion mode, with plans to grow in Malaysia, the Philippines and Bangladesh.

In particular, Kenanga Research Edotco may potentially gear up to fund its expansion in the Philippines.

Edotco recently ventured into the Philippines in September 2023 via the acquisition of 2,710 tower sites.