Axiata repositioning for higher dividends and consolidation, says AmInvestment

KUALA LUMPUR (Dec 4): AmInvestment Bank Bhd has retained it's "buy" call for Axiata Group Bhd at RM3.84, with unchanged forecasts and a sum-of-parts-based fair value (FV) of RM4.50 per share, backed by the likelihood of near-term rerating catalysts from an industry consolidation and doubling of its dividends due to organic growth driven by asset optimisation, cost reduction and with it reprioritising investment portfolios for shorter payback returns.

The research house said it attended the analyst-and-investor online conference hosted by Axiata yesterday and said the company's management views the industry consolidation as likely in Malaysia, Indonesia and Bangladesh, which could mean collaborative alliances for resources or a business merger given the intense competition, high capital expenditure (capex) for fifth-generation network (5G) roll-outs and spectrum acquisitions, coupled with regulatory challenges in Covid-19-stricken countries in the region.

"Besides monetising edotco and Axiata Digital Services’ investments, management hinted at the possibility of an initial public offering (IPO) for Celcom, given that the group views, as we do, that it is currently grossly undervalued as compared to its local peers," the research house added in a note today.

For a regional telco operator with excellent opportunities to further unlock its undervalued assets and engage in merger and acquisition (M&A) activities, it said Axiata currently trades at a bargain financial year ending Dec 31, 2021 (FY21) forecasted enterprise value/earnings before interest, tax, depreciation and amortisation (EV/EBITDA) of four times versus Maxis Bhd's 12 times.

It added that Axiata's valuation is even more compelling given its three-star rating for environmental, social and governance (ESG) compliance on the FTSE4Good Index.

AmInvestment said some highlights during the conference shared by Axiata about its targets by 2024 are that the group will cut its cost per gigabyte (cost/GB) by 75% to below 10 sen from 60 sen in FY19, while raising its earnings before interest and tax (EBIT) margin to above 20% (from 14% in FY19) and dividend per share to over 20 sen (from 9.5 sen for FY19).

"This will entail a normalised profit after tax and minority interest (PATAMI) of over RM1.8 billion, 50% above our FY22 earnings [forecast].

"The assumptions are based on a revenue growth of over RM6 billion, reduction in opex (operating expenditure) growth by over RM3 billion, cut in depreciation and amortisation by RM1 billion,
decrease in financing cost by over RM100 million and by capping the ratio of mobile capex to revenue at below 20%," it added.

The research house also shared that Axiata's management is projecting stronger revenue growth for the next four years, which would be propelled by the enterprise (up a low teen percentage), tower infrastructure (up a low teen percentage), home (+40%) and digital (+50%) businesses.

Furthermore, it said Axiata would also be revising its dividend payout policy for its operating companies, and set a minimum 50% payout with the intention to reach 100%, subject to the operating free cash flow.

The only exception is 63%-owned edotco, which would need to fund its tower footprint expansion, with a lower minimum dividend payout ratio of 25%.

At 10.30am today, Axiata shares were traded up one sen or 0.26% at RM3.85, valuing the stock at RM35.21 billion.

Year-to-date (YTD), the counter had declined 7% from RM4.14 on Dec 31, 2019.